Bitcoin's growing prominence of MEV: How MEV is spreading to Bitcoin in more subtle ways
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Bitcoin's growing prominence of MEV: How MEV is spreading to Bitcoin in more subtle ways
MEV on Bitcoin is becoming increasingly prominent through practices such as front-running Ordinal inscriptions, block stuffing, and miner cartelization.
Navigating Web3 tides with focused insightsBy George Kaloudis, CoinDesk
Translated by Felix, PANews
Key Takeaways:
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Arbitrage opportunities exist in both traditional finance and crypto, but they are more pronounced in the latter due to visible pending transactions and longer settlement times.
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Although MEV on Bitcoin is not as prominent as on Ethereum, it is emerging through practices such as front-running Ordinal inscriptions, empty block mining, and miner cartelization.
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The emergence of MEV on Bitcoin could create pressure toward "privatizing" the mempool, undermining core principles of cryptocurrency.
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One so-called “killer app” of cryptocurrency and blockchain is the ability to trade various assets without centralized financial intermediaries. Never mind that most of these assets do nothing—or allegedly do nothing. People have made huge returns trading them. Just like everyone got rich from SHIB in 2020, then traded WIF and PEPE again in 2023.
When early capital flows into these tokens, it first purchases them via automated market makers (AMMs) on decentralized exchanges (DEXs), before they are listed on centralized exchanges (CEXs). AMMs are decentralized applications that match buyers and sellers of crypto tokens without going through regulated exchanges or KYC procedures (such as passport photos, driver’s license images, or multiple selfies). All you need to do is connect your crypto wallet, input which asset you want to buy via the AMM, and click purchase.
What's interesting about these AMMs—aside from the convenience and privacy of avoiding identity checks—is that while crypto influencers often promote cryptocurrencies and blockchains as the "next iteration" of stock markets, in some ways, stock markets are more real-time than AMMs.
Take a simple example: A wants to buy stock XYZ at $100, while B wants to sell stock XYZ at $99. Because today’s financial markets are highly interconnected, C somehow learns this information (through legal or illegal means of gathering and processing data), buys XYZ from B at $99, and immediately sells it to A at $100. Everyone is happy: A gets XYZ stock, B receives $99, and C earns $1 through arbitrage.
Now, that profitable trade has been completed. As the transaction settles, arbitrageur C has consumed the market inefficiency for stock XYZ (the $1 difference between A’s bid and B’s ask). This all happens in real time—that is, linearly—where C must step precisely between A and B to execute the trade, and must do so in strict sequence (from A to C to B).
Though slightly different in form, this type of arbitrage also occurs within AMMs. Suppose you heard about SHIB early and wanted to buy some before it was listed on a CEX. Since it wasn’t available on an exchange, you used an Ethereum-based AMM and clicked the button to purchase SHIB tokens. When you placed your order, it entered a large pool of pending Ethereum transactions. Some of these might be people buying goods online with USDC, but many others involve trades of tokens like SHIB, WIF, or PEPE.
These transactions are visible to everyone before they’re finalized and executed because they reside in a space called the mempool. If the AMM pricing for SHIB is incorrect due to market inefficiencies (just like in the stock XYZ example), someone on the network can construct an Ethereum transaction to buy SHIB before your trade executes via another AMM, then sell it back to you at a profit.
To take another example, suppose you’re placing a very large buy order for SHIB. In this case, everyone can see that a significant, market-moving transaction is pending, allowing others to trade around your order and exploit both the market inefficiency and your order’s impact on prices.
Such transactions can be classified as sandwich trades. Some use the term “sandwich attack” because the AMM fails to match buyers with intended sellers, potentially causing the original buyer to suffer heavy losses before the trade completes (imagine wanting to buy one billion SHIB tokens but only receiving 800 million due to sandwiching caused by AMM inefficiencies).
Sandwich trades and other forms of “inefficiency discovery” fall under the broader category known as Maximal (or Miner) Extractable Value (MEV). MEV refers to validators choosing to reorder transactions in ways that benefit themselves rather than traders. Because block times (the time required to validate transactions) aren't instantaneous—on Ethereum, blocks are validated roughly every 12 seconds—there’s ample time for arbitrage, especially for trading bots.
Given this, it’s not hard to imagine MEV expanding beyond AMMs. A reasonable conclusion from the preceding technical argument is: the more complex the desired action, the greater the likelihood of MEV arising.
MEV: Pros, Cons, and Its Presence on Bitcoin
Discussions surrounding MEV are extensive. Is it good or bad? Is it illegal?
It depends on who you ask.
On the positive side, MEV represents a free market mechanism that calculates the true cost of things on the blockchain by eliminating inefficiencies—inefficiencies that would otherwise persist until nearly zero. On the negative side, MEV may allow sophisticated actors to repeatedly exploit uninformed outsiders and new users.
So far, we’ve only mentioned Ethereum because although MEV had a head start there, historically it hasn’t existed on Bitcoin. While theoretically possible, it hasn’t been economically feasible in practice—except under very specific circumstances.
You might be thinking: “No MEV? If Ethereum-based AMMs have MEV, surely Bitcoin-based AMMs must have MEV too?”
You're right—except there currently aren’t any Bitcoin-based AMMs. This is because Ethereum is more expressive than Bitcoin, meaning you can “do more with it,” such as creating tokens with Doge or other memes, trading them on AMMs, and getting rich.
And because Bitcoin lacks expressiveness, there isn’t a thriving market for new tokens or AMMs on Bitcoin. If no new non-Bitcoin assets exist on Bitcoin, how could MEV opportunities related to AMMs arise? Trading Bitcoin for other Bitcoin?
Yes. This is exactly where MEV on Bitcoin begins to emerge.
MEV on Bitcoin
MEV on Bitcoin is significantly less robust than on Ethereum, and experts always discuss the topic with caveats.
Colin Harper, head of research and content at Luxor Technology, a Bitcoin mining company, said: “It’s more like a game you can play rather than full-blown MEV.”
Three years ago, Bitcoin underwent an upgrade called Taproot, making the network more expressive. Through the Ordinals protocol, NFT-like functionality unexpectedly became possible on Bitcoin. This is what we mean by “trading Bitcoin for other Bitcoin”: “NFTs” can function on Bitcoin because the Ordinals protocol identifies which satoshis (the smallest unit of Bitcoin, one hundred millionth of a BTC) carry arbitrary data—images, text, or other content. These collectibles are called inscriptions and differ from NFTs (separate tokens). When you purchase an inscription, instead of acquiring a brand-new token like on Ethereum, you’re simply buying certain bitcoins that are only special from the perspective of the Ordinals protocol.
This is effectively buying Bitcoin with Bitcoin (albeit buying high and selling low). Just as buying SHIB with ETH or USDC with USDT are tradable activities, purchasing Bitcoin with Bitcoin is something that can be front-run.
As Colin Harper explains: “When you list an inscription for sale on Magic Eden or similar marketplaces, you use a PSBT (Partially Signed Bitcoin Transaction). The seller signs their half, and when a buyer purchases, they complete the transaction with their signature—the buyer pays the transaction fee. So if an NFT trader sees this transaction in the mempool, they can broadcast their own transaction to replace the original buyer’s payment and address (stealing the deal). To do this, they broadcast a higher-fee RBF (Replace-by-Fee) transaction to ensure their transaction confirms before the original.”
While this isn’t quite the same as the pure MEV discussed in the first section, it still looks like MEV: intended buyers and sellers are mismatched because a third party intervenes and offers miners greater compensation for the inscription, and miners maximize their own value by accepting the third-party transaction.
Other MEV-Like Phenomena on Bitcoin
Bitcoin still has miners, and within mining operations, several behaviors occur frequently that resemble MEV.
A common example is empty block mining. Bitcoin periodically mines empty blocks. These blocks are useless to anyone except the miner who found them because, aside from the coinbase transaction (lowercase “c”, not the company) rewarding the miner, no other pending transactions are confirmed. There are technical reasons for this—empty blocks appear somewhat randomly—but it's difficult to say whether this constitutes MEV or whether it benefits Bitcoin.
There's also miner cartelization (PANews note: a cartel is a monopolistic group, easily formed when a few entities control scarce resources). Many Bitcoin miners now use mining pools to stabilize income by collectively mining and sharing rewards proportionally. This can create problems, especially as mining pools grow larger. As Walt Smith of venture firm Cyber Fund wrote in a long article titled “MEV on Bitcoin”:
“…mining pools enable sophisticated multi-block MEV by increasing the odds of winning consecutive blocks, introducing systemic risk. Mining pools and other mining cartels abuse pool economics to enforce standardized block templates and blacklist smaller miners performing non-standard block construction. Persistent excess fees combined with economies of scale trigger consolidation, creating a pathological cycle.”
Currently, some mining pools control a substantial portion of the network’s hash power, and even two or three pools together could command over half. If mining pool cartels win enough consecutive blocks, they could exercise monopoly power to maximize profits.
Another real-world example of potentially MEV-like behavior among Bitcoin miners is out-of-band payments. Miners are compensated for including transactions considered non-standard—either off-chain or through separate and seemingly unrelated Bitcoin transfers. Again, this isn’t pure MEV since the extracted value doesn’t originate from intelligent programmatic decisions on-chain. Instead, value is extracted by miners receiving more compensation than they otherwise would.
Some researchers worry that out-of-band payments represent the first step down a slippery slope that could obscure incentive structures. Yet miners are seizing this opportunity. Marathon, a publicly traded mining giant, launched a service called Slipstream that accepts non-standard transactions.
The concern is that such opaque practices could lead to mempool privatization—an alarming prospect on any blockchain. As CoinDesk’s Sam Kessler wrote: “Most urgently, there's concern that mempool privatization could entrench new intermediaries in key parts of the Ethereum transaction pipeline.”
If most transactions are submitted to private mempools for confirmation, only a select few—the designated insiders—would influence Bitcoin transactions. This would centralize power on the blockchain, clearly unacceptable for anyone who values censorship resistance.
There are other MEV-like examples on Bitcoin that inevitably exist in some form, and network participants should remain vigilant.
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