Unbeknownst to the average DeFi user, battlelines are currently being drawn as we speak in the ever evolving realm of MEV (Miner-Extractable Value, or… Maximal-Extractable Value as the cool kids are calling it nowadays).
As the dust slowly settles from when FrankResearcher first shared on-chain evidence of explicit arbitrage MEV amongst miners last year, several new groups of participants have been scrambling to establish dominance.
In this article I explore (just the surface) of the various groups competing to extend their reach across MEV domains and their respective attributes.
The new MEV participants have varying degrees of hashpower support from their own circle of MEV-friendly miners but they are broadly categorized into the following:
Group 1: Frontrunning / Backrunning Cartels
These groups were operating long before MEV became the mainstream threat it is today, even dating back to the pre-Defi frontrunning Bancor days in early 2018. Therefore they already have the established infrastructure to easily evolve into monopolistic and horizontally integrated MEV Searcher Cartels.
In plain English, this means:
Group 2: DAO/Protocol-Based MEV Groups
As seen with KeeperDAO's Rook, 1inch's dark pools, the miner-centric ArcherDAO and more recently the YCabal proposal for SushiSwap, these groups leverage MEV strategies 'for the good of the DAO/Protocol'.
In plain English, this means:
Group 3: Decentralized MEVs Groups
The likes of Flashbots which is democratizing access to MEV revenue by providing publicly accessible MEV infrastructure along with mining pool support for independent developers across the ecosystem.
Mining Pool Participation
The following mining pools are all currently competing for a piece of the MEV pie:
Privately mined transactions technically aren't considered MEV but they do complement MEV strategies so it's worth mentioning SparkPool and Ethermine as the main dark pool proponents (77% of all privately mined TXs are mined by Ethermine as quoted from this research paper).
Value Extraction
Based on the Flashbots' MEV explorer we are currently trending over $1.2M worth of MEV revenue extracted across the entire network per day and almost one Beeple NFT per month. Among this, you would have seen plenty of MEV alphas like zero gas flashloan-powered arbitrages, sandwiches and NFT rescues on Twitter and Etherscan these days. Those are already considered mainstream by MEV standards.
✌️Value Extraction✌️
I vaguely touched on a few MEV dark alphas recently and there was interest in clarifying MEV liquidation strategies in detail.
Liquidations, as you well know, is when a particular loan position falls below a protocol-specified threshold (Health Factor). At which point anyone can call the relevant liquidation function for that loan and claim the collateral at a heavy discount at the borrower's expense.
Which brings us to Capital loss-generating ✌️Liquidation✌️(a.k.a. Stale Toasting) via MEV. Tokentax's general advice on liquidation states that any liquidation event will be:
"…treated as if you had sold that crypto for fiat, meaning that you realize any capital gain or loss on those assets"
A shady tactic in this context revolves around purposely lowering the health factor of your position to trigger a liquidation, BUT you end up as the guaranteed liquidator of your own position to trigger a paper loss.
This is only possible via MEV as you're able to submit both the liquidation triggering Tx and a backrunning Tx within the same MEV bundle, which results in you being the first to liquidate yourself in the same block before any other liquidation bot even sees it. In layman's terms, MEV infrastructure allows you to specify logic that ensures the first Tx is mined ONLY IF the 2nd backrun Tx is successful, otherwise it's as if nothing happened, like a flash loan revert. Unlike a flashloan, you incur zero gas fees when it reverts. It's a cap loss on paper, but in reality you got your collateral back elsewhere. Would be interesting to see whether your local tax office is savvy enough to understand all this.
This is bananas...
This is just the tip of the iceberg and there's a whole dark forest within the dark forest, where unscrupulous predators stalk other successful predators by decoding their transactions so they can keep stalking them even after they change contracts to evade detection, and that's before we even start talking about how MEV will look on L2, but that's an article for another time.
BSC
This question has come up a few times because since Binance Smart Chain is a modified fork of Ethereum, shouldn't they face the same threats?
The simple answer is no, it is unlikely any one of the established BSC validators would try to develop self serving MEV arrangements and risk the wrath of CZ. It'd only be a short term gain with long term pain (blacklisting). If they do, I guess you could call it CEV (CZ-approved Exploitable Value), which is unlikely to happen.
AVAX
I believe AVAX's consensus model is leaderless, thus theoretically speaking the MEV as we know it in Ethereum would not apply as there isn't a single entity that handles block production or to determine transaction ordering. I say 'theoretically' because whatever consensus mechanism is used in their leaderless model may be gamed to produce a variant of the MEV as we currently know. Similar to the current lack of visibility into L2 MEV dynamics in Ethereum, we won't know for sure until we actually get there. Nevertheless I'm keeping an eye on these folks' progress too (I'm running out of eyes).
It's a scary forest out there, but align yourself with one of the three aforementioned MEV groups instead of going at it alone and you'll have a slightly less horrifying time.
Stay safe,
fifikobayashi
ACK: Thanks to @epheph, @onewayfunction, @tzhen and the rest of the Flashbots crew for being my technical sounding board on all things MEV.