MEV Has Spread to Bitcoin, in Subtler Forms Than on Ethereum

One
of
the
supposed
“killer
apps”
for
cryptocurrencies
and
blockchains
is
the
ability
to
trade
all
kinds
of
assets
(if
you
can
call
them
that)
without
a
centralized
financial
intermediary.
Never
mind
that
the
majority
of
these
assets
do
nothing
or

purportedly
do
something
by
doing
nothing
at
all.
People
have
made
immense
returns
trading
them.

Like
the
time
in
2020
when
everyone
got
rich
off
of
SHIB
and
then
again
in

2023
trading
WIF
and

trading
PEPE.

When
the
early
capital
piled
into
these
tokens,
they
were
first
purchased
on
decentralized
exchanges
with
Automated
Market
Makers
(AMM)
well
before
they
were
available
on
centralized
crypto
exchanges.
AMMs

are
decentralized
applications
which
match
buyers
and
sellers
of
crypto
tokens
without
all
the
data
sharing
rigmarole
associated
with
a
regulated
exchange.
No
passport
pictures
or
snaps
of
your
driver’s
license
or
treble
selfies
or
need
to
wait
for
anything
or
anyone
in
particular.
All
you
have
to
do
is
connect
your
crypto
wallet,
tell
the
AMM
you
want
to
buy
a
certain
amount
of
a
certain
asset,
click
buy,
and
you’re
on
your
way.

What’s
immediately
interesting
about
these
AMMs
(aside
from
the
convenience
and
privacy
of
avoiding
identity
checks)
is
that
while
crypto
opinion
leaders
promote
crypto
and
blockchains
as
the
“next
iteration”
of
the
stock
market
(imagine
the
stock
market,
but
it
never
closes…
and
if
you
make
a
mistake
there
is
no
recourse
…
which
isn’t
great
unless
you
somehow
profit
off
of
a
mistake
or
glitch,
like
say
if
you
were
on
the
right
side
of
the
trade
when
Berkshire
Hathaway
stock
appeared
to
trade
at

around
$180
instead
of
around
$600,000),
in
a
way
equities
markets
are
more
real-time
than
AMMs
are.

Crude
example:
Person
A
wants
to
buy
Stock
XYZ
at
$100
and
Person
B
is
selling
Stock
XYZ
at
$99.
Because
today’s
financial
markets
are
so
hyperconnected,
Person
C
somehow
knows
this
(there
are
legal
and

illegal
ways
to
find
and
act
on
this
information)
and
buys
Stock
XYZ
from
Person
B
for
$99
and
instantly
sells
it
to
Person
A
for
$100.
Everyone
is
happy:
Person
A
gets
Stock
XYZ,
Person
B
gets
$99,
and
Person
C
gets
$1
arbitraging
the
trade.

That
money
making
trade
is
now
over,
done
and
dusted,
and
with
it
gone
and
gobbled
up
by
the
arbitrageur
Person
C
is
the
inefficiency
in
the
market
for
Stock
XYZ
(the
$1
difference
between
Person
A’s
buying
price
and
Person
B’s
selling
price).
And
this
all
happened
in
real
time,
by
which
we
mean
linearly,
Person
C
had
to
get
in
between
Person
A
and
B
at
exactly
the
right
time
to
execute
that
trade
and
it
had
to
happen
in
that
order
(A
to
C
to
B).

We
can,
of
course,
see
the
same
type
of
arbitrage
with
AMMs,
albeit
in
a
slightly
different
form.
Suppose
you
heard
about
SHIB
early
and
you
wanted
to
buy
some
before
it
was
available
on
a
centralized
exchange.
Because
it’s
not
on
an
exchange
you
called
on
an
Ethereum-based
AMM
(SHIB
was
created
on

Ethereum
as
an
ERC-20
token),
and
you
clicked
the
buttons
to
make
your
purchase
of
SHIB
tokens.
When
you
make
that
order,
it
gets
thrown
into
a
big
batch
of
proposed
Ethereum
transactions.
Some
of
those
transactions
could
be
people
buying
stuff
online
with
USDC,
but
many
of
them
are
trades
for
tokens
like
SHIB
or
WIF
or
PEPE.

All
these
transactions
are
viewable
by
everyone

before
they’re
finalized
and
carried
out
because
they
hang
out
in
a
digital
waiting
room

called
the
mempool.
If
the
AMM
you
used
for
your
trade
mispriced
SHIB
because
of
a
market
inefficiency
(like
in
our
Stock
XYZ
example)
someone
on
the
network

could
construct
an
Ethereum
transaction
that
purchases
the
SHIB
before
you
using
a
different
AMM
to
then
sell
it
to
you
for
a
profit
(because,
remember,
these
transactions
are
viewable
before
they’re
finalized).

To
take
this
example
even
further,
let’s
assume
your
purchase
of
SHIB
is
rather
large.
In
this
situation
everyone
can
see
your
very
large,
market-moving
transaction
is
pending
and
can
place
trades
around
yours
to
take
advantage
of
both
market
inefficiencies
and
the
market-moving
nature
of
your
order.

Trades
like
this
can
be
grouped
together
under
the
rubric
of

sandwich
trades.
Some
opt
for
the
term
sandwich

attacks
because
the
AMM
is
not
matching
the
buyer
to
the
intended
seller
or
sellers
and
because
it
could
lead
to
the
original
buyer
losing
out
in
a

big
way
before
their
trade
even
goes
through
(imagine
if
you
wanted
to
buy
1
billion
SHIB
tokens
and
you
only
got
800
million
because
of
an
AMM
inefficiency
getting
sandwich-traded).

Sandwich
trades
and
other
types
of
“inefficiency
finding”
are
more
broadly
called

Maximal
(or
Miner)
Extractable
Value.
(Miners
don’t
exist
in
Ethereum
anymore,
hence
the
rebrand).
This
is
what
crypto
technobabblers
mean
when
they
use
the
initialism
MEV
in
conversation
as
if
that’s
common
parlance
(a
la
high
finance’s

EV
or

IRR).
All
MEV
means
is
that
in
crypto
those
who
verify
transactions
choose
to
order
them
in
a
way
which
is
most
profitable
for
themselves
rather
than
for
the
transactors.
Because
block
times
(the
time
it
takes
for
transactions
to
be
verified)
are

not
real
time
(in
Ethereum
transactions
are
verified
every
12
seconds
or
so),
there’s
plenty
of
real-world
time
to
make
arbitrage
trades.
Especially
if
you
are
a

bot
instead
of
an
actual
human.

With
this
in
mind,
it
shouldn’t
take
much
to
imagine
that
MEV
has
expanded
beyond
AMMs.
A
fair
conclusion
to
the
preceding
technobabble
is
this:
The
more
complicated
the
thing
you’re
trying
to
do
is,
the
more
likely
MEV
will
occur
(just
like
in
regular
ol’
finance).

The
discussion
around
MEV
is
expansive.

Is
it
good?

Is
it
bad?

Is
it
illegal?

Depends
whom
you
ask.

On
the
plus
side,
MEV
is
the
free
market
figuring
out
the
actual
costs
of
things
on
blockchains
by
snuffing
out
inefficiencies
which
will
be
taken
advantage
of
until
the
inefficiency
approaches
zero.
On
the
minus
side,
MEV
makes
it
possible
for
unknowing
laypeople
and
newer
users
to
get
absolutely
demolished
by
the
experts
and
the
power
users
(sound
familiar?).

So
far,
we’ve
only
mentioned
Ethereum
because,
for
all
its
first
mover
advantage,
MEV
has
historically
not
existed
on
Bitcoin.
It
existed
in
theory,
but
in
practice
it’s
not
economically
viable
(except
in
very
specific
situations).

You’re
probably
wondering:
“No
MEV?
If
there’s
MEV
for
Ethereum-based
AMMs
then
surely
there’s
one
for
the
Bitcoin-based
AMMs?”

And
you’d
be
right
except
that
there
aren’t
any
(meaningfully
sized)
Bitcoin-based
AMMs.
That’s
because
Ethereum
is
more
expressive
than
Bitcoin,
meaning
you
can
“do
more
stuff
with
it,”
like
create
coins
with
dog
mascots
or
other
memes
to
trade
on
AMMs
and
become
rich.

And
because
Bitcoin
isn’t
as
expressive,
there
isn’t
a
thriving
market
or
AMM
for
new
tokens
on
Bitcoin.
And
without
new,
fresh
non-bitcoin
assets
on
Bitcoin
how
could
an
AMM-related
MEV
opportunity
present
itself?
What
exactly
would
you
be
doing?
Trading
bitcoin
for
other
bitcoin?

Well,
yes.
This
is
exactly
where
MEV
on
Bitcoin
has
begun
to
present
itself.

MEV
is
nowhere
close
to
as
robust
on
Bitcoin
as
it
is
on
Ethereum
and
when
the
topic
is
discussed
among
experts
it’s
always
larded
with
caveats.

“It’s
more
like
games
you
can
play
than
MEV,”
said
Colin
Harper,
head
of
research
and
content
at
bitcoin
mining
firm
Luxor
Technology
(no
relation
to
the
hotel
in
Vegas).

Three
years
ago,
Bitcoin
went

through
an
update
called
Taproot,
which
made
the
network
more
expressive.
This
expressivity
also
accidentally
made
the

Bitcoin
equivalent
of
NFTs
possible
through

Casey
Rodarmor’s
Ordinals
protocol.
This
is
what
I
mean
by
“trading
bitcoin
for
other
bitcoin”:
“NFTs”
can
work
on
Bitcoin
because
the

Ordinal
protocol
is
able
to
see
which
satoshis
(the
smallest
unit
of
bitcoin,
a
hundred
millionth)
are
inscribed
with
arbitrary
data
which
can
be
a
picture
or
text
or

something
else.
These
collectibles
are
called
inscriptions
so
as
to
not
be
confused
with
NFTs
(which
are
separate
tokens).
If
you
were
buying
an
inscription,
instead
of
buying
an
entirely
new
token
as
you
would
on
Ethereum,
you’re
just
buying
some
bitcoin
that’s
only
special
when
seen
through
the
lens
of
the
Ordinals
protocol.

This
is,
literally,
buying
bitcoin
with
bitcoin
(buying
less
with
more,
of
course).
And
like
buying
SHIB
for
ETH
or
USDC
for
USDT,
buying
bitcoin
with
bitcoin
is
an
activity
that
can
be
front-run.

“When
you
sell
inscriptions
on

Magic
Eden
or
another
marketplace
like
it,
you’re
using
a
PSBT
[Partially
Signed
Bitcoin
Transaction],”
Harper
explained.
“The
seller
signs
their
half,
and
when
the
buyer
purchases
it
they
complete
the
transaction
with
their
signature
and
the
buyer
pays
the
fee
for
the
transaction.
So
if
an
NFT
trader
sees
the
transaction
in
the
mempool,
they
can
snipe
it
by
broadcasting
their
own
transaction
that
replaces
the
original
buyer’s
payment
and
address
with
their
own.
To
do
so,
they
broadcast
an
RBF
[Replace-By-Fee]
transaction
with
a
higher
fee
to
ensure
that
their
transaction
is
confirmed
before
the
original
one.”

Although
this
isn’t
quite
like
the
pure-play
MEV
as
discussed
in
the
first
section
of
this
article,
it
still
looks
like
MEV:
The
intended
buyer
and
seller
weren’t
matched
because
a
third
party
came
in
and
offered
more
compensation
for
miners
in
exchange
for
the
inscription
and
miners
maximized
their
own
value
in
the
transaction
by
accepting
the
third
party
transaction.

Bitcoin
still
has
miners
(read
here
what
that
means
compared
to
Ethereum’s
validators)
and
in
the
business
of
mining
there
are
some
things
happening
somewhat
regularly
which
look
like
MEV.

One
common
example

is
the
mining
of
empty
blocks.
Periodically,
a
bitcoin
block
is
mined
with
nothing
in
it.
The
block
is
useless
to
anyone
save
the
miner
who
won
the
block,
as
no
transactions
which
are
waiting
to
be
confirmed
are
verified
except
for
the

coinbase
(small
“c,”
not
the
company)
transaction
which
rewards
the
miner
with
the
block
reward.
There’s
a
technical
reason
this
happens,
and
really
it’s
an
accident
that
empty
blocks
even
occur,
but
it’s
hard
to
argue
that
this
is
a)
not
MEV
and
b)
good
for
Bitcoin
(although
it
is
also
hard
to
argue
that
it’s
bad).

There’s
also
the
cartelization
of
miners.
Many
bitcoin
miners

now
use
mining
pools
to
smooth
out
their
revenue
by
mining
in
aggregate
and
being
paid
their
proportional
share.
This
could
present
an
issue,
especially
as
mining
pools
get
bigger
and
bigger.
As

Walt
Smith
of
VC
firm

Cyber
Fund
wrote
in
an

extensive
“MEV
on
Bitcoin”
piece:

Right
now,
some
mining
pools
control
a
massive
share
of
total
network
hashrate
and
two
or
three
of
them
could
club
up
to
control
over
half
of
the
computational
power.
If
this
cartel
of
pools
won
enough
blocks
in
a
row,
it
could
exercise
its
monopoly
power
to
maximize
profits.

There’s
one
more
real
example
of
bitcoin
miner
behavior
which
might
be
MEV:
out-of-band
payments.
These
are
instances
where
bitcoin
miners
are
paid
(either
off-chain,
or
in
a
separate
and
seemingly
unrelated
bitcoin
transfer)
to
accept
transactions
which
are
considered
non-standard.
Again,
this
isn’t
pure-play
MEV,
because
the
extracted
value
does
not
occur
on
the
blockchain
as
the
result
of
savvy
programmatic
decisions.
Instead,
value
is
extracted
by
miners
being
paid
more
than
they
would
have
been
paid
otherwise
to
do
something.

Some
researchers
worry
that
out-of-band
payments
are
the
first
step
on
a
slippery
slope
and
could
obscure
incentives.
But
miners
are
jumping
at
the
opportunity.
Publicly
traded
mining
giant
Marathon
(NASDAQ:
MARA)
has

launched
a
service
called
Slipstream
offering
to
accept
non-standard
transactions.

The
concern
is
that
this
under-the-table
practice
could
lead
to
private
mempools,
which
would
be
troubling
on
any
blockchain.

As
CoinDesk’s
Sam
Kessler
writes:
“Most
pressingly,
there’s
the
worry
that
private
mempools
might
cement
new
middlemen
at
key
areas
in
Ethereum’s
transaction
pipeline.”

If
private
mempools
become
where
most
transactions
are
submitted
for
confirmation,
that
would
make
it
so
only
the
selected
few,
the
somehow
ordained
few,
can
affect
Bitcoin
transactions.
This
would
centralize
authority
on
the
blockchain,
an
obviously
unsavory
situation
for
anyone
who
values
censorship
resistance.

There
are
other
examples
of
MEV
on
Bitcoin
and
more
will
inevitably
crop
up.
Since
it’s
here
in
some
form,
network
participants
need
to
pay
attention.

Note:
The
views
expressed
in
this
column
are
those
of
the
author
and
do
not
necessarily
reflect
those
of
CoinDesk,
Inc.
or
its
owners
and
affiliates.