How MEV is Changing Bitcoin Mining

Bitcoin mining revenue streams are historically very boring. Miners earn money from two sources: in-protocol grants and transaction processing fees. Sometimes a company will pay miners to put a special message in a block header. Sometimes cryptocurrency exchanges negotiate fees with pools to reserve block space during times of high network congestion. But these payments are exceptional and infrequent events. Mining expenses are paid with royalty and grant revenue.

The future of bitcoin mining revenue, however, is likely to be the opposite of boring. And more bitcoin investors should start paying attention, even those who don’t mine.

The basics of extractable value from miners

Miner’s Extractable Value (MEV) measures revenue from block production activities that goes beyond typical grant and fee revenue by controlling the inclusion, exclusion, and ordering of transactions within a given block. Miners control all of these things – including, excluding, and ordering transactions – but they’re not the only ones earning MEV.

Seekers are network participants who monitor on-chain transaction activity for MEV opportunities. These opportunities are usually automatically submitted to miners by a seeker’s bots with higher than normal fees associated with MEV transactions to ensure their inclusion in a new block by financially incentivizing miners to do so, thereby mining successfully set. Thus, miners and researchers generally share the revenue from any given MEV opportunity.

Readers should also be aware that there is some disagreement about the meaning of MEV. Traditionally, the term represents extractable value from miners, but some developers have recently begun to refer to MEV as maximum extractable value to include forms of on-chain value extraction not specific to mining. (The objectives of this article are achieved by referring to value extraction specific to mining.)

It’s unlikely that most readers have even heard of MEV, let alone understand many of the common strategies for this source of income for miners. But the general financial public is paying attention, and bitcoin investors should too.

MEV is gaining ground

This month, the Bank for International Settlements (BIS) released an eight-page bulletin on cryptocurrency miners and MEV. The report stands out for the surprising depth of its analysis of the mining industry and MEV specifically, including mentions of various MEV strategies (i.e. BIS is a global financial organization established in 1930 to provide banking services to banks centrals and other international financial entities.

“Since when does the BRI know what a ‘replay attack’ is”, tweeted Robert Miller, Product Manager at FlashBots, the industry’s leading MEV research and development organization.

But BIS is not the only consumer entity aware of SRM. In a cryptocurrency-focused hearing held by the U.S. Senate Banking Committee last year, for example, one person made lengthy comments about SRM in his written testimony and answers to Senate questions. Acting Chief of the Office of the Comptroller of the Currency, Michael Hsu, also referred to MEV last year as one of several topics that raised “difficult and inconvenient questions” for the industry.

So why should bitcoin investors care?

The Bitcoin MEV Landscape

Trigger warning: This section mentions the name of Vitalik Buterin’s blockchain. But don’t stop reading.

When miners and mining analysts discuss MEV today, the Ethereum economy is their main focus simply because of the number of “decentralized finance” applications and projects currently running on this blockchain. Aside from the merits and core value of these projects, the more applications built on a blockchain and the more on-chain activity they generate, the more opportunities there are for MEV.

So – back to Bitcoin – the more optimistic someone is about 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. “DeFi needs Bitcoin,” wrote a lawyer. MicroStrategy CEO Michael Saylor also believes the Bitcoin protocol will play a vital role in “the next generation of DeFi.” A recent report changed (or reiterated) the naming convention of Bitcoin-based DeFi, calling it “LiFi” (Lightning Finance), a reference to the Lightning Network. Whatever its name, Bitcoin’s DeFi ecosystem will drive the growth of its MEV market.

During a MEV live stream, researcher Nathan Worsley commented on the current and future state of Bitcoin’s MEV, saying, “Bitcoin often takes a very conservative philosophical approach to a lot of things. [DeFi] problems, so they pushed back DeFi development down the road a bit. But as Bitcoin’s DeFi ecosystem grows, Worsley said his “[MEV] issues will become more relevant.

MEV exists on Bitcoin

The Bitcoin network today is not a total MEV desert.

“There are more MEVs on Bitcoin than Bitcoiners like to acknowledge,” Miller said on the live stream with Worsley. “And there’s a certain MEV in Bitcoin that’s just not really being exercised by miners right now,” he added.

Lisa Neigut, Lightning Network Engineer at Blockstream, led the recent conversations around Bitcoin MEV with a post about Lightning Network MEV. In it, she theorizes the MEV opportunities of using Lightning Network and (more importantly) considers how MEV researchers in Bitcoin can impact on-chain transactions for Lightning Network channels. Speaking of MEV and the Lightning Network, Miller also added, “There are many grief vectors where you can make money if you assume you are a counterparty in a channel and a miner.”

More Bitcoin MEV is coming

For now, most MEV research and earnings are not on Bitcoin. But a robust decentralized financial ecosystem running on Bitcoin will change that. MEV is a complex and not universally good or necessarily liked aspect of on-chain activity. But bitcoin investors should pay attention to this area of ​​their own ecosystem and recognize its potential for growth. Learning from MEV challenges and mistakes in other cryptocurrency ecosystems (e.g. Ethereum) can save a lot of headaches and heartache in the Bitcoin economy.

This is a guest post by Zack Voell. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Comments are closed.