{"id":9893,"date":"2022-06-26T20:04:04","date_gmt":"2022-06-27T01:04:04","guid":{"rendered":"http:\/\/blog.jlbn.net\/?p=9893"},"modified":"2022-06-26T20:04:05","modified_gmt":"2022-06-27T01:04:05","slug":"mev-is-coming-to-bitcoin-and-it-will-change-mining-profitability","status":"publish","type":"post","link":"http:\/\/blog.jlbn.net\/?p=9893","title":{"rendered":"MEV IS COMING TO BITCOIN AND IT WILL CHANGE MINING PROFITABILITY"},"content":{"rendered":"\n

Mainstream financial audiences are now paying attention to miner extractable value (MEV), and bitcoin investors should too.<\/em><\/strong><\/p>\n\n\n\n

Bitcoin mining revenue streams are historically very boring. Miners earn money from two sources: subsidies built into the protocol and fees for processing transactions. Sometimes a company will pay miners to put a\u00a0special message<\/a>\u00a0in a block header. Sometimes cryptocurrency exchanges will negotiate fees with pools to reserve block space during times of high network congestion. But these payments are exceptional and infrequent occurrences. Mining expenses are paid with fee and subsidy revenues.<\/p>\n\n\n\n

The future of bitcoin mining revenue, however, is likely to be the extreme opposite of boring. And more bitcoin investors should start paying attention \u2014 even ones who aren\u2019t mining.<\/p>\n\n\n\n

THE BASICS OF MINER EXTRACTABLE VALUE<\/h2>\n\n\n\n

Miner extractable value (MEV) measures the revenue taken from block production activities that goes beyond typical subsidy and fee revenue through controlling the inclusion, exclusion and ordering of transactions within any given block. Miners control all of these things \u2014 transaction inclusion, exclusion and ordering \u2014 but they aren\u2019t the only ones who earn MEV.<\/p>\n\n\n\n

Searchers are network participants who monitor on-chain transaction activity for MEV opportunities. These opportunities are typically submitted automatically to miners by a searcher\u2019s bots with higher-than-normal fees associated with the MEV transactions to ensure their inclusion in a new block by financially incentivizing miners to do so, which allows the value to be successfully extracted. Thus, miners and searchers generally share revenue from any given MEV opportunity.<\/p>\n\n\n\n

Readers should also know that there is some disagreement on what MEV means. Traditionally, the term represents miner extractable value, but some developers<\/a> have recently started referring to MEV as maximal extractable value to include non-mining-specific forms of on-chain value extraction. (The purposes of this article are met by referring to mining-specific value extraction.)<\/p>\n\n\n\n

Most readers are unlikely to have even heard of MEV, much less understand many of the common strategies for this source of miner revenue. But mainstream financial audiences are paying attention to it and bitcoin investors should too.<\/p>\n\n\n\n

MEV IS GAINING TRACTION<\/h2>\n\n\n\n

This month, the Bank for International Settlements (BIS) published an\u00a0eight-page bulletin<\/a>\u00a0on cryptocurrency miners and MEV. The report was notable for the surprising depth in its analysis of the mining industry and specifically MEV, including mentions of various MEV strategies (i.e., sandwich and replay attacks) and the mechanics of block organization and production. BIS is a global financial organization\u00a0that was created in 1930<\/a>\u00a0to provide banking services to central banks and other international financial entities.<\/p>\n\n\n\n

\u201cSince when does the BIS know what a \u2018replay attack\u2019 is,\u201d tweeted<\/a> Robert Miller, product lead at FlashBots, the industry\u2019s leading MEV research and development organization.<\/p>\n\n\n\n

But BIS isn\u2019t the only mainstream entity aware of MEV. During a cryptocurrency-focused hearing held by the U.S. Senate\u2019s Banking Committee last year, for example, one individual made extensive comments about MEV in their written testimony<\/a> and their answers to questions from the Senate. The acting chief of the Office of the Comptroller of the Currency, Michael Hsu, also referred<\/a> to MEV last year as one of several topics that raised \u201cdifficult and inconvenient questions\u201d for the industry.<\/p>\n\n\n\n

So why should bitcoin investors care?<\/p>\n\n\n\n

THE BITCOIN MEV LANDSCAPE<\/h2>\n\n\n\n

Trigger warning: This section mentions the name of Vitalik Buterin\u2019s blockchain. But don\u2019t stop reading.<\/em><\/p>\n\n\n\n

When miners and mining analysts discuss MEV today, the Ethereum economy is their primary focus simply because of the number of \u201cdecentralized finance\u201d applications and projects that currently run on that blockchain. Merits and fundamental value of those projects aside, the more applications built on a blockchain and the more on-chain activity generated by them, the more opportunities for MEV exist.<\/p>\n\n\n\n

So \u2014 back to Bitcoin \u2014 the more bullish someone is on a Bitcoin-based decentralized finance (DeFi) ecosystem, the more they should consider the opportunities and threats created by a robust MEV market that will follow. \u201cDeFi needs Bitcoin,\u201d wrote<\/a> one advocate. MicroStrategy CEO Michael Saylor also thinks<\/a> the Bitcoin protocol will play an integral role in \u201cthe next generation of DeFi.\u201d One recent report altered (or iterated on) the naming convention for Bitcoin-based DeFi, calling it \u201cLiFi<\/a>\u201d (Lightning Finance), a reference to the Lightning Network. Whatever it\u2019s called, Bitcoin\u2019s DeFi ecosystem will cause its MEV market to grow.<\/p>\n\n\n\n

On a live stream about MEV, searcher Nathan Worsley commented<\/a> on the current and future state of Bitcoin\u2019s MEV, saying, \u201cBitcoin often philosophically takes a very conservative approach to a lot of [DeFi] issues, so they\u2019ve pushed off a little bit of the DeFi development down the road.\u201d But as Bitcoin\u2019s DeFi ecosystem grows, Worsley said its \u201c[MEV] problems will become more pertinent.\u201d<\/p>\n\n\n\n

MEV EXISTS ON BITCOIN<\/h2>\n\n\n\n

The Bitcoin network today is not a total MEV wasteland.<\/p>\n\n\n\n

\u201cThere\u2019s more MEV on Bitcoin than Bitcoiners like to acknowledge,\u201d Miller\u00a0said<\/a>\u00a0on the live stream with Worsley. \u201cAnd there\u2019s some MEV in Bitcoin that just isn\u2019t really being exercised by miners right now,\u201d he\u00a0added<\/a>.<\/p>\n\n\n\n

Lisa Neigut, a Lightning Network engineer at Blockstream, spearheaded recent conversations around Bitcoin MEV with an article<\/a> about Lightning Network MEV. In it, she theorizes MEV opportunities from Lightning Network use and (more importantly) considers how MEV searchers in Bitcoin may impact on-chain transactions for Lightning Network channels. Talking about MEV and the Lightning Network, Miller also added<\/a>, \u201cThere\u2019s a lot of griefing vectors where you can make money if you assume you are a counterparty in a channel and a miner.\u201d<\/p>\n\n\n\n

MORE BITCOIN MEV IS COMING<\/h2>\n\n\n\n

For now, most MEV searching and earning is not happening on Bitcoin. But a robust decentralized finance ecosystem running on Bitcoin will change that. MEV is a complex and not universally good or necessarily well-liked aspect of on-chain activity. But bitcoin investors should pay attention to this area of their own ecosystem and recognize its growth potential. Learning from the challenges and mistakes of MEV in other cryptocurrency ecosystems (e.g., Ethereum) can prevent much headache and heartache in the Bitcoin economy.<\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Mainstream financial audiences are now paying attention to miner extractable value (MEV), and bitcoin investors should too. Bitcoin mining revenue<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3423,254,3421],"tags":[3472,3440,3426,888],"_links":{"self":[{"href":"http:\/\/blog.jlbn.net\/index.php?rest_route=\/wp\/v2\/posts\/9893"}],"collection":[{"href":"http:\/\/blog.jlbn.net\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/blog.jlbn.net\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/blog.jlbn.net\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/blog.jlbn.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=9893"}],"version-history":[{"count":1,"href":"http:\/\/blog.jlbn.net\/index.php?rest_route=\/wp\/v2\/posts\/9893\/revisions"}],"predecessor-version":[{"id":9894,"href":"http:\/\/blog.jlbn.net\/index.php?rest_route=\/wp\/v2\/posts\/9893\/revisions\/9894"}],"wp:attachment":[{"href":"http:\/\/blog.jlbn.net\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=9893"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/blog.jlbn.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=9893"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/blog.jlbn.net\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=9893"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}