Original compilation: Peng SUN, Foresight News
Original compilation: Peng SUN, Foresight News
* Note: The statistical range of clearing transactions calculated in this report is from May to December 2022, and the statistical range of other types is the whole year of 2022.
1. A new perspective of MEV
At present, most reports and articles on the topic of MEV revolve around the concept introduction and how to introduce orders into the MEV market. Centralization risks or censorship issues related to mechanism design, these are the directions that many blockchain protocol and application layer builders are working hard to solve.
In addition, Amber Group and Forbes also wrote about a large number of long-tail MEV cases, the inside story of Nathan Worsley, the famous MEV searcher Nathan Worsley, and Wintermute and Alameda Research, two quantitative institutions that run MEV strategies. Their articles all mentioned the concept of Payment for Order Flow, which seems to be a big trend, and developers are working hard for it, including Cowswap, 1inch Fusion mode and Flashbots MEV-Share. Mainstream financial institutions have also begun to pay attention to the MEV field. For example, Nasdaqs News and Insights column reposted CoinDesks article on how JIT robots and MEV can promote DeFi. Of course, there are also a small number of people concerned about the regulation of the MEV market.
In fact, in addition to the general attention to the operation of the MEV macro market mechanism, we believe that there is another micro issue worthy of attention: as a representative, MEV transactions mean that liquidity data (liquidity data) has unprecedented opportunities and challenges.
As early as May 2022, in the series of events triggered by the UST-LUNA circuit breaker, financial institutions engaged in encryption business have been targeted by users and publicly disclosed their balances. This situation is not common in traditional finance, because the transparency and openness of the blockchain ledger allows anyone to obtain transaction data for free. Through on-chain transactions, we can obtain historical price information and liquidity data generated and updated in real time. Of course, the transparency of liquidity data can also help encrypted financial institutions establish real-time risk control mechanisms based on liquidity and realize crises earlier.
This report aims to prompt users to pay attention to the value and risk of existing liquidity data in order to better protect assets or design better protocols to protect users.
2. Overview of the MEV market in 2022
MEV is the truest reflection of DeFi market liquidity. In 2022, MEV robots will generate at least $307 million in revenue on Ethereum. Therefore, this section will provide an overview of the MEV market in 2022.
(1) MEV trading opportunities increase throughout the year
In 2022, the number of MEV transactions increases over time. Arbitrage bots trade the most, accounting for 68.3% of the market, and sandwich attacks are around 30.6%. The chances of clearing a transaction are much smaller than those of the other two MEV types, and although the statistical range is from May to December, this difference is not significant. As a result, liquidation opportunities are more likely to depend on sharp market volatility than traditional arbitrage trades.
At the same time, the total number of MEVs per month is trending upwards, reflecting a steadily increasing opportunity for MEV seekers in the market.
(2) Market share and trend of different MEV types
The MEV revenue that searchers can generate from the marketplace comes from three different types, arbitrage gains from narrowing the price differential between markets, sandwich attack gains through front-running user trades, and gains from leveraging debt and collateral during market volatility The difference between the values gets a liquidation yield.
Below is an overview of revenues, costs and margins for MEV transactions. (Note: Clearing data starts from May)
Mainstream MEV bots will generate at least $307 million in revenue in 2022, with MEV searchers earning $145 million, or over 47.5%, of total revenue from arbitrage trading, and $128 million, or 41.7%, from sandwich attacks about. While revenues are similar, sandwich MEVs are significantly more expensive and less profitable than arbitrage transactions. The arbitrage searcher generated $75 million in profit, while the sandwich attack only generated $26 million in profit. Starting in May 2022, clearing transactions totaled $33 million in revenue at a cost of $16 million, and liquidation bots ended up generating over $16 million in profits from the market. In fact, sandwich attackers pay block builders and validators nearly 79% of their revenue. It can also be seen from the figure below that compared with arbitrage trading, the monthly Cost Revenue Ratio (Cost Revenue Ratio) of sandwich trading is higher, with an average of 0.78 for sandwich trading and 0.49 for arbitrage trading.
Overall, the revenue generated by arbitrage searchers was relatively high in January, May, June and November, and remained stable in the rest of the months. Except for November, the revenue of sandwich robots showed a downward trend in the third and fourth quarters. Among the monthly income generated by liquidation transactions, the income in May, June, and November was significantly higher than other months, because the sharp drop of ETH in May and June and the CRV short squeeze event led to liquidation opportunities.
(3) MEV robot
The graph below shows that there are a large number of bots generating negative profits, with 68% of arbitrage bots generating positive profits, 67% of sandwich bots, and 51% of liquidation bots.
As for the life cycle of MEV robots, a large part is one-off robots and a smaller proportion is long-term robots. Searchers can use a one-time bot for testing purposes, and once a viable strategy is identified, the bot is transferred to a new address to execute that strategy long-term. On average, arbitrage bots tend to have a shorter lifespan than sandwich and liquidation bots.
Additionally, this article ranks the top 10 most profitable robots by MEV robot profit and their percentage of total profit for all robots. The data shows that the profits of the top 10 arbitrage robots accounted for about 51.3%, the profits of the top 10 sandwich robots accounted for 74.8%, and the profits of the top 10 liquidation robots accounted for as high as 90.2%.
Liquidation bots are highly competitive, with the top two liquidation bots dominating with over 53% of profits, other liquidation bots must find ways to out-strategize these top bots to gain market share. Interestingly, the most profitable arbitrage bot, 0x bad, executed fewer trades, as he created the most profitable single arbitrage trade, which generated over $3 million in profit from a single atomic trade during the Nomad cross-chain bridge breach in August , which shows that strategy is extremely important for MEV.
(4) MEV before and after The Merge
In 2022, a total of $133.8 million in MEV value is allocated to miners or block builders responsible for collecting transactions and building blocks, with MEV values paid for arbitrage transactions, sandwich attacks, and liquidation transactions being $45.8 million, $73.9 million, and 14.1 million, respectively Dollar. Among them, the sandwich attack contributes more than half of MEV to miners or block builders, and is its main source of incentives. After the Ethereum merger, the MEV contribution percentage of sandwich transactions also increased.
100 days before the merger of Ethereum, Ethermine and F 2 Pools MEV revenue accounted for 31.46% and 13.91% respectively. After the merger, the top two block builder addresses took more than half of the MEV, accounting for 30.4% and 29.41% respectively. Although changes in the off-chain auction market for block space affect the allocation of MEV, the oligopoly pattern remains unchanged.
(5) Calibration of transaction volume involving MEV
In 2022, the total volume of MEV transactions involving sandwich robots will be US$287 billion, accounting for 87.5%, which is significantly higher than the volume of arbitrage transactions. Likewise, sandwich volume consistently dominates the total MEV volume each month. Perhaps because the FTX crash led to an influx of users into DEXs to exchange assets, sandwich trading saw a particularly noticeable increase in November.
Uniswap V3 is the most popular protocol for arbitrage bots and sandwich bots, with a combined trading volume of $72.8 billion, Uniswap V3’s sandwich trading volume is an order of magnitude higher than arbitrage trading volume. For protocols such as DODO and Uniswap V3, the sandwich transaction volume accounts for almost half of the total transaction volume, which is worthy of user consideration.
(6) MEV market comparison on Ethereum and BNB Chain
As for different blockchain platforms, MEV opportunities on BNB Chain are much more cost-effective than Ethereum, as the average cost-to-revenue ratio (CRR) of arbitrage bots on BNB Chain is significantly lower than Ethereum. In 2022, the total revenue generated by arbitrage searchers from BNB Chain is $95 million, which is lower than Ethereums $145 million arbitrage income, but the total profit generated by BNB Chain searchers is $90 million, which is higher than Ethereums $75 million .
Compared to Ethereum, arbitrage bots on BNB Chain do not face much competition. The top 10 arbitrage robots accounted for 25% of the profits generated on BNB Chain, which is lower than Ethereum’s 51.3%. Therefore, the chances of arbitrage bots on BNB Chain are fairer than those on Ethereum. Newcomers are more likely to find a friendly environment to explore BNB Chain.
3. Current situation and prospect of MEV market
Based on the above data analysis, this section will reveal the main current trends and new opportunities for MEV in the future.
(1) Current status: MEV infrastructure
The most critical infrastructure of the MEV market is the auction market, which ensures that the transactions of MEV robots are packaged on the blockchain. In order to achieve a fairer MEV market (at least this is the vision of Flashbots), this auction market began to be subdivided from the original dark forest (Mempool) to an off-chain professional auction market provided by relayers represented by Flashbots MEV-geth .
After the merger, the Ethereum Foundation began to implement the pre-PBS scheme. In the PBS scheme, block builders such as Flashbots and builder 0x69 bid for the right to build the next block, while validators propose the block with the highest bid. This approach effectively subdivides the process of packaging MEV transactions into two auction markets, one opened by block builders for MEV bots to bid for block space, and the other open by validators for builders to bid for block space. Bidding for the right to build a block. Routing between block builders and validators can also be done through third-party relayers (such as MEV-boost) to achieve data privacy and maintain fairness. The degree of competition in the two auction markets will affect the distribution of revenue for MEV robots.
The confrontation between centralization and decentralization. As this chart from mevwath.info shows, OFAC (Office of Foreign Assets Control) compliant blocks are battling hard against non-OFAC compliant blocks.
Financial engineering infrastructure is often overlooked by the market. In the future, MEV robots will provide more high-end and professional financial engineering services for the DeFi ecosystem. They need to rely on data services and financial derivatives to enhance their performance.
Flash loans are a typical financial instrument popular with MEV bots.
(2) Discussion: Outlook for New Opportunities in 2023
In 2022, there are increasing opportunities for MEV bots to extract value from DeFi protocols, which is a strong trend. Arbitrage trading remains the dominant type in the MEV market, accounting for a major share of revenue and profits. And arbitrage bots, which trade most frequently in most months, pay out a smaller percentage of income to rent-seekers than sandwich bots. A comparison of the total number of independent bot addresses also shows that arbitrage bots are more diverse, suggesting that sandwich bots and liquidation bots may have additional thresholds.
A new MEV robot called JIT has seen an increase in trading opportunities over the past few months. As JIT bots provide a large amount of centralized liquidity, there also appears to be a growing trend for independent exchange users to benefit from JIT activity. This is also verified by slippage data from real exchange transactions and simulations. JIT bots are trying to provide liquidity in an innovative and more capital efficient way than other kinds of active liquidity management strategies. It is worth considering that related parties such as AMM protocol designers directly provide similar functions, which can connect exchange users and liquidity providers in a new way, while improving user experience and increasing income for liquidity providers.
Besides these mainstream MEV bots, another off-chain MEV market is opening in some DEXs and aggregators. Users trading orders are transmitted directly to the routers created by these protocols in the form of dark pool orders or limit orders. Searchers can access these invisible orders to the mempool under a set of auction rules, and extract value by providing optimized settlement services. The Payment for Order Flow business seems to be a major trend that developers are working on, including Cowswap, 1inch Fusion mode, and Flashbots MEV-Share. Although this model was controversial when it was adopted by Robinhood very early, there is no clear regulatory policy yet.
Payment for Order Flow is effectively a democratization of MEV if users are rewarded for providing information. The democratization of MEV is a frequently discussed topic in the community. Another proposal is to distribute a portion of validators’ MEV revenue to the Ethereum community via liquidity staking, although given the current rates on liquidity staking platforms like Lido Finance, this has yet to materialize. The booming MEV market has also attracted developers of DeFi protocols to think about how to use MEV to improve customer experience and protect customer interests.
4. MEV transactions worthy of attention in 2022
(1) The beauty of arbitrage
On August 1, 2022, the arbitrage robot 0x baDc made a profit of $3.197 million from a single-space arbitrage between two Uniswap WETH/WBTC pools, and spent $2057 to reversely run a large exchange transaction in the Nomad cross-chain bridge vulnerability.
(2) Diversified sandwich transactions
The sandwich attack pattern is getting more and more complex, there has been a sandwich attack with 56 victims in 2022, and a sandwich attack when adding/removing liquidity.
Sandwich attack of 56 transactions: On Uniswap V2, there are 56 transactions in a block that exchange WETH for MEME, and sandwich bots attack them together. This shows that the sandwich robot does not necessarily only attack one transaction, and splitting a large order into multiple small orders does not guarantee that the trader can escape the fate of being attacked.
Sandwich attack of adding/removing liquidity: Sandwich robots do not necessarily attack exchange transactions on DEX, adding and removing liquidity may also be attacked. In past research, the sandwich attack on adding liquidity can be regarded as a risk-free arbitrage on the change of slippage before and after adding liquidity to the pool. The attacked liquidity provider and other liquidity providers may bear losses. Likewise, withdrawing liquidity can also be attacked, and liquidity providers can incur similar losses. Therefore, liquidity providers should set checkpoints carefully and be aware that sandwich attacks profit from their losses.
(3) The dilemma of the lever sandwich
In some skilful sandwiches, flash loans provide the capital needed for leverage, with traders only needing to put a fraction of their capital into front-run trades, pushing up the victim’s trade price, prolonging the potential gains. The downside of this, however, is that there is also an increased risk of sandwich robots. In particular, if the front-running transaction package is successful, but the corresponding trailing transaction (back-run) is not successful, then the sandwich robot will lose money. A sandwich robot using this strategy may pay a higher MEV cost to prioritize transactions.
(4) Long-tail MEV transactions
MEV types may not be limited to arbitrage, liquidation, sandwich, or JIT, and multiple attacks in 2022 can also be classified as long-tail MEV.
existAbracadabra ArbitrageIn the event, the attacker used the protocols price cache design and the update mechanism of the protocols price oracle to complete arbitrage. In Mongo Squeeze andCRV short-queezeIn the incident, the attacker manipulated the liquidity of the market and madebad debt. existAnkr attackIn the incident, the attacker used the stolen private key of the Ankr deployer to attack the token issuance mechanism and successfully obtained benefits.
At the same time, the large capital flows that accompany transactions often present opportunities for traditional MEV bots, while large exchanges within AMMs also present significant arbitrage opportunities. As mentioned above, months involving major risk events are often accompanied by higher overall arbitrage profits. Additionally, the large price changes associated with liquidity manipulation by CRV shorts provided more opportunities for liquidation bots. For example, during the CRV short squeeze event, a liquidation bot implementedProfitable Liquidation Strategies, earning over $1 million in revenue.
5. MEV robot and DeFi ecosystem
Since the concept of MEV became popular, most peoples first impression of it is negative. MEV incentivizes miners to rent-seek to obtain a large amount of revenue packaging transaction demand, and the PGA competition among MEV robots increases the average transaction fee level of Ethereum. More importantly, MEV may also threaten the security and decentralization of the blockchain protocol itself. MEV bots can extract value by monitoring pending transactions and frontrunning transactions or sandwich attacks, a negative externality that many protocol developers try to mitigate.
But one has to face the fact that MEV is fundamental due to the nature of blockchain protocols in terms of achieving openness and transparency. From the perspective of DeFi protocols, MEV robots can also provide multiple types of value. The most common arbitrage bots detect price differences between DEXs or CEXs and profit by buying low and selling high. Their calculation of liquidity pool price deviations improves the efficiency of market price discovery. Liquidation bots monitor the healthy ratios of mortgages and initiate liquidations when collateral values plummet, which helps the deleveraging process, especially during times of market volatility.
In the future, just like the JIT robots and statistical arbitrage market makers that have emerged in this market, there will be more different robots that are proficient in calculations, profit from data analysis and financial engineering, and are the smooth automation of DeFi systems important parts of.
On the other hand, the interaction of MEV robots with other participants of the DeFi protocol has also become more complex and important. As the alternative sandwich bots and JIT bots reveal, the victims of sandwich bots are not necessarily just exchange users, but also liquidity providers. Exchange users will not necessarily incur more slippage losses due to the sandwich bot, but may benefit from the slippage discount brought by the JIT bot.
andUniswap V3andCurveImpact. On Uniswap V3, the income scale of mainstream MEV robots accounted for 25% of the income of liquidity providers. On Curve, MEV volume represents 20% of total volume on most days.
According to EigenPhi analysis, in 2022, arbitrage and sandwich robots will contribute a total of $328 billion in transaction volume to DEX, accounting for about 49% of the total transaction volume of $666 billion generated on DEX that year.
To sum up, we can see that MEV robots have become an integral part of the DeFi community that cannot be ignored. Understanding the transactional relationships between MEV robots and other entities can help stakeholders better understand the long-term impact of MEV on AMM.
