This report will analyze the increase in the complexity of MEV on Bitcoin and evaluate its impact on the broader ecosystem.
Author: Jeffrey Hu
Translation: DeepTechFlow
This article is co-authored by: Jeffrey HU from HashKey Capital, Jinming NEO, and George ZHANG from Flashbots.
Introduction
The concept of Bitcoin MEV (Miner Extractable Value) first appeared as early as 2013. Although relatively new compared to Ethereum's MEV, with the introduction of meta-protocols such as BRC-20, Ordinals, and Runes, the thriving Bitcoin ecosystem promises to bring more programmability, expressiveness, and MEV opportunities in the future.
This report will analyze the increase in the complexity of MEV on Bitcoin and evaluate its impact on the broader ecosystem.
Why the Increasing Focus on Bitcoin MEV?
Before the introduction of Ordinals, MEV on Bitcoin was not widely recognized and was not considered important, with the focus mainly on Lightning Network and sidechain mining attacks. However, the Taproot upgrade brought more expressiveness and programmability to Bitcoin, facilitating the introduction of meta-protocols such as Ordinals and Runes, bringing the issue of MEV to the forefront. The 10-minute block time of Bitcoin has exacerbated this issue, making inexperienced users more susceptible to various MEV attacks, such as fee sniping in the engraving market. As block rewards decrease, miners' profitability is affected, prompting miners to focus on maximizing transaction fees, which may explain the rise in MEV activity.
The following graph shows the increase in fees relative to block rewards during the launch of the highly anticipated Ordinals and Runes, which at one point accounted for over 60% of Bitcoin mining revenue.
Source: Dune analytics (@data_always), proportion of transaction fees to mining rewards, as of July 22, 2024.
So far, we have seen a growing number of BTCFi applications and developments that have transformed Bitcoin from just a digital gold/payment network to a rapidly growing ecosystem with expanding utility. This may bring more MEV opportunities to Bitcoin.
Differences Between Bitcoin and Ethereum MEV
There is less discussion about Bitcoin MEV, which can be attributed to the fundamentally different architectural designs of Bitcoin and Ethereum.
Architectural Design
Ethereum runs on the Ethereum Virtual Machine (EVM), executing smart contracts and achieving programmability through maintaining a global state machine.
Ethereum adopts an account-based model, running transactions in the order of their transaction sequence numbers. This means the order of transactions affects their results, allowing searchers to easily identify MEV opportunities and directly add their transactions before or after user transactions. For example, if both Alice and Bob submit transactions to Uniswap to exchange 1 ETH for USDT, the transaction executed first in the block will receive more USDT.
In contrast, Bitcoin's script language does not have the same statefulness as Ethereum and uses the UTXO model. For standard Bitcoin transfers, only the intended recipient can spend the Bitcoin with a valid signature, which does not lead to users competing for the use of these funds. However, on Bitcoin, it is also possible to create UTXOs that can be spent by multiple parties using scripts or SIGHASH unlocking. The transaction confirmed first is the one that can spend that UTXO. Nevertheless, because the unlocking conditions for each UTXO are only related to that UTXO itself and not dependent on other UTXOs, competition is limited to that UTXO.
Altcoins on Bitcoin
In addition to the fundamental design differences mentioned above, the introduction of valuable assets other than BTC also incentivizes Miner Extractable Value (MEV). MEV generated in these scenarios is essentially the result of protocol designers attempting to build new asset categories and on-chain behaviors using scripts + UTXO (Bitcoin's unique data structure), specifying the order of asset ownership and on-chain behavior validity. Because events are defined based on order, there is an incentive for competition in order, resulting in MEV.
If we disregard other assets, rational miners would only package legitimate transactions based on transaction fees and charge fees based on transaction size. However, if Bitcoin transactions are not limited to standard transfers, such as minting new valuable assets (e.g., Runes), miners can employ various strategies, not just considering Bitcoin transaction fees: 1) review transactions and replace them with their own minting transactions; 2) demand higher fees from users (on-chain, off-chain, or sidechain payments); 3) engage multiple users in bidding wars, leading to fee wars.
Minting
A direct example is the minting process of assets such as Runes or BRC20, which typically sets a maximum limit for minting assets. The first confirmed minting transaction is considered successful, while other transactions are considered invalid. Therefore, in this case, the order of transactions becomes crucial and brings about MEV opportunities through transaction ordering.
In addition, the concept of rare bitcoins (satoshis) introduced by Ordinals has even raised concerns that miners may trigger block reorganizations during halving to compete for high-value rare bitcoins.
Staking
In addition to minting, protocols like Babylon with staking also set limits on the assets that can be staked at each staking stage. Even if users exceed the limit, they can still construct and transfer Bitcoin to the staking lock script, but this will no longer be considered a successful stake and will not qualify for future rewards. In other words, the ordering of staking transactions is equally crucial.
For example, shortly after the launch of the Babylon mainnet, the staking limit for the first stage reached 1,000 BTC, resulting in an overflow of about 300 BTC that needed to be unstaked.
At the launch of the Babylon mainnet, the fee rate rose to 1,000 sats/vBytes, source: Mempool.space
In addition to on-chain minting/engraving of assets and staking, certain activities on sidechains or aggregation chains are also affected by MEV. More examples will be provided in the "MEV Events on Bitcoin" section.
What is Considered Bitcoin MEV?
So, what qualifies as MEV on Bitcoin? After all, the definition of MEV can vary in different circumstances.
Generally speaking, MEV on Bitcoin refers to the way miners manipulate the block creation process to extract maximum profit. We can roughly classify it as follows:
Users Paying Extra Fees: Users looking to expedite transactions typically achieve this through off-chain transaction acceleration services, which are often expensive as users need to pay higher fees to have their transactions prioritized. Traders can also pay miners higher fees through mechanisms like RBF (Replace-By-Fee) and CPFP (Child-Pays-For-Parent) to prioritize their transactions and achieve faster confirmation times. Low-fee transactions typically face longer confirmation times because profit-driven miners prioritize higher-fee transactions for block inclusion.
Collusion Between Users and Miners: Users collude with miners to review and include certain transactions of specific importance. For example, malicious users collude with miners to review and exclude penalty transactions on the Lightning Network to illegally obtain assets within channels. Other new systems like BitVM and their penalty transactions face similar risks.
Bitcoin Miners Mining on Sidechains/L2: This includes various early merged mining schemes where miners use Bitcoin's computational power to secure another network. Merged mining can lead to miner centralization, as large miners may use their computational power on the main chain to influence block production, ordering, and other operations on L2, gaining excessive L2 mining rewards and potentially impacting the security of the L2 network.
A fee bidding method that tends towards public market (such as RBF) plays a relatively positive role in the overall economic system, promoting a free market economy. However, when users engage in off-chain payments with mining pools, this undoubtedly threatens the decentralization and censorship resistance of the network, often referred to as "MEVil."
Examples of Bitcoin MEV
Based on the above classification, we can see several cases of MEV.
Non-Standard Transactions
The Bitcoin Core software only allows nodes to process standard transactions, with a size limit of 100 kvB. However, mining pools still include high-fee non-standard transactions in blocks, often excluding other low-fee transactions.
Some typical cases include:
Block 776,884: Mined by the Terra mining pool, this block contained an engraving transaction with a size of 849.93 kvB. The engraving was a 1-minute MP4 video of a frog holding a drink, bringing the miner a fee of 0.5 BTC.
Block 777,945: Contained a 4000 x 5999 pixel WEBP image with a size of 975.44 kvB, bringing the miner a fee of 0.75 BTC.
Block 786,501: Engraving a JPEG image of Julian Assange on the cover of a Bitcoin magazine brought the miner approximately 0.5 BTC in fees, with a size of 992.44 kvB.
By default, Bitcoin Core nodes only allow the forwarding of standard transactions. Therefore, non-standard transactions must be sent directly to mining pools through private mempools. Private mempools allow mining pools to accept non-standard transactions and prioritize user transactions. While this can speed up transaction processing, more transactions being directed to private mempools may lead to increased centralization of mining pools and censorship risks. Clearly, some mining pools are already taking advantage of the profitability of private mempools.
For example, Marathon Digital has introduced "Slipstream," a direct transaction submission service that allows customers to submit complex and non-standard transactions.
MEV Events on Sidechains/L2
The Stacks sidechain uses a unique consensus mechanism called Proof of Transfer (PoX), allowing Bitcoin miners to mine Stacks blocks and settle transactions on the Bitcoin blockchain while earning STX rewards.
In the past, Stacks used a simple miner election mechanism where high-hashrate Bitcoin miners were more likely to mine Stacks blocks, review other miners' commitment transactions, and monopolize all rewards. If more miners adopt this strategy, future Stackers may face reduced earnings.
Impact on the ecosystem:
- The reward ultimately passed on to the Stacker will decrease by excluding other honest miners' commitments.
- If large miners continue to abuse their computational power and exclude honest miners' commitments, it may lead to centralization risk, allowing a few miners to monopolize all Stacks rewards.
However, this issue will be addressed through the Satoshi upgrade for Stacks, which will make this strategy unprofitable. The upgrade will transition from a simple miner election to using a lottery algorithm and adopt the Assumed Total Commitment with Carryforward (ATC-C) technology to reduce the profitability of MEV mining. Miners are expected to continuously participate in the most recent 10 blocks to qualify for the lottery. Miners who fail to mine at least 5 blocks out of the most recent 10 blocks will lose eligibility to receive Stacks rewards. With ATC-C, the probability of miners winning Stacks blocks is now equal to the ratio of the miner's BTC expenditure to the median total BTC commitment in the most recent 10 blocks. This reduces the likelihood of miners disproportionately benefiting from excluding other miners' block commitments.
Bidding for Alternative Asset Transactions
MEV related to alternative assets like Ordinals and Runes can be divided into the two types mentioned earlier:
Mining Pool Extracting Additional Value: Mining pools can extract additional value by including Bitcoin Ordinals or rare Satoshis in blocks and transactions.
Fee Sniping Transactions: Traders may bid to include transactions related to these alternative assets in blocks.
For mining pools, the initial success of Runes has brought additional sources of profit. For example, during the halving event, the highly anticipated launch of Runes led to a surge in network transaction volume and fees, with many users vying to have their transactions included in the historic Bitcoin halving block. Post-halving, transaction fees rose to over 1,500 sats/vByte (compared to less than 100 sats/vByte before the halving). ViaBTC capitalized on this surge, mining the halving block released simultaneously with Runes, earning a profit of 40.75 BTC, with 37.6 BTC coming from fees related to Runes. With block rewards now halved, transaction fees for Runes have become a source of profit for miners.
Source: Mempool.space
Source: Mempool.space
For traders, Bitcoin transactions using Runes and Ordinals adopt SIGHASHSINGLE|SIGHASHANYONECANPAY as part of the Partially Signed Bitcoin Transactions (PSBTs), allowing only one signed input to correspond to one output. Combined with the transparency of the mempool, this enables many buyers to discover potentially profitable transactions. Therefore, traders often use RBF and CPFP, leading to competitive fee wars that allow miners to capture MEV from this demand. For example, when a seller lists their assets for sale, buyers can bid and use RBF to increase their transaction fees when there is competition, hoping their transactions will be confirmed.
A typical example of competition between traders is transaction ID 2ffed299689951801a68b5791f261225b24c8249586ba65a738ec403ba811f0d. After the seller listed their assets, this transaction was replaced multiple times using RBF, with fee rates of 238, 280, 298, and 355 sat/vB.
Source: Mempool.space
Another example involves the OrdiBots minting process on the Magic Eden platform. Multiple users became victims of front-running attacks on the transaction pool. OrdiBots used PSBTs for minting inscriptions on Magic Eden. The existence of PSBTs and the 10-minute interval for Bitcoin block generation allow potential buyers to compete for the same transaction by introducing different addresses and signatures, only by paying higher fees. This resulted in some whitelisted users being unable to mint due to interference from front-running bots. (The team later apologized for this and promised to compensate affected users with customized OrdiBots.)
However, not all MEV-related technologies or events are harmful to users. In some cases, MEV technology can also protect user assets from loss. For example, without RBF, erroneous transactions would be unable to recover, and unconfirmed transactions could remain unconfirmed for a long time, leading to opportunity costs. Additionally, running RBF contributes to the security of the Bitcoin network. With block subsidies expected to decrease relative to transaction fees in the future, transaction fees will play a crucial role in incentivizing miners to continue participating in the Bitcoin network. Bitcoin developer Peter Todd also actively advocates for the benefits of RBF and recommends miners to run full RBF.
Key Technological Components Supporting MEV on Bitcoin
So, what are the key technological components or methods on Bitcoin that support these MEV opportunities? Commonly involved technological areas include mempools, RBF (Replace-By-Fee), CPFP (Child-Pays-For-Parent), mining pool acceleration services, and mining pool protocols.
Mempools
Similar to Ethereum and other typical blockchain networks, Bitcoin also has a transaction pool structure used to store transactions received by P2P nodes but not included in blocks. The transparency and decentralization of mempools create an environment conducive to MEV opportunities, allowing all transactions to be propagated to miners.
However, unlike Ethereum's gas mechanism, Bitcoin's fees are only related to transaction size. Therefore, Bitcoin's transaction pool can be seen as a more direct block space auction market, where you can see which users are bidding for the next block and their bids.
Since different nodes receive different transactions from P2P propagation, each node has a different mempool. Additionally, each node can actively customize its own relay strategy (mempool policy), defining which transactions it wants to receive and relay. Mining pools can also choose which transactions to include in blocks based on their preferences (although economically, they prioritize high-fee transactions). For example, the Bitcoin Knots node filters out any Ordinals transactions, while Marathon Mining created a pixel-style logo in the block explorer.
Block 836361 (color of pixels shows fee rate), Source: mempool.space
Therefore, users may consider sending transactions directly to specific miners or mining pools to expedite transaction inclusion, but this approach may affect two key characteristics highly valued by the Bitcoin community: privacy and censorship resistance.
Transactions propagated through P2P nodes, rather than directly (e.g., through RPC endpoints) sent to miners or mining pools, help blur the origin of transactions, making it more difficult for miners and mining pools to censor transactions based on identified information.
In addition to using transaction acceleration services, users can also choose to accelerate their transactions through RBF and CPFP.
RBF and CPFP
Replace-By-Fee (RBF) and Child-Pays-For-Parent (CPFP) are methods commonly used by users to increase transaction priority.
RBF (Replace-By-Fee) allows an unconfirmed transaction in the mempool to be replaced by another conflicting transaction (also referencing at least one of the same inputs), but with a higher fee rate and overall higher fee. Similar to the discussed mempool policy, RBF can be implemented in various ways. The most common implementation is Opt-In RBF, designed by BIP125, where only specially marked transactions can be replaced. Another approach is Full RBF, in which transactions can be replaced regardless of whether they are marked.
CPFP (Child-Pays-For-Parent) uses a different method to accelerate transaction confirmation. Unlike in RBF where replacement transactions are stuck in the mempool, the recipient can accelerate the pending parent transaction by sending a child transaction using the UTXO of the pending transaction and paying a higher fee rate. This may incentivize miners to include these transactions together in the next block. Therefore, you may sometimes see low-fee transactions included in a block, even though the fee rate was high at some point; these transactions likely used CPFP (because the subsequent transaction paid the fee).
Using CPFP to confirm a low-fee parent transaction (7.01 sat/VB), Source: mempool.space
The key difference between RBF and CPFP is that RBF allows the sender to replace a pending transaction with a higher fee rate transaction, while CPFP allows the recipient to accelerate a pending transaction by sending a higher fee rate child transaction. CPFP is also useful for transactions needing to exit the Lightning Network, such as anchor outputs. In terms of cost, RBF has a cost advantage as it does not require additional block space.
External Fee Payments and Mining Pool Acceleration Services
In addition to methods like RBF (Replace-By-Fee) and CPFP (Child-Pays-For-Parent), users can also choose to use external fee payments to accelerate their transactions. For example, many mining pools offer free and paid transaction acceleration services, allowing users to submit their txID to expedite transaction processing. In the case of paid services, users need to pay a service fee to support the mining pool. Since this service involves paying fees through systems outside the Bitcoin network (e.g., through websites, credit card payments, etc.), it is referred to as external fee payments.
While external fee payments provide a remedy for transactions that cannot use RBF or CPFP, widespread long-term use may impact Bitcoin's censorship resistance.
Mining Pool Protocols
In previous discussions, we treated mining pools and miners as a single entity, but in reality, they need to work together. Mining pools aggregate miners' computational power for mining and distribute rewards based on the contribution of computational power. This cooperative process requires certain protocols for coordination.
In common mining pool protocols, such as Stratum v1, the mining pool only needs to provide a block template (including block header and coinbase transaction information) to miners, who then perform hash calculations based on this template. There are also tools like stratum.work that visualize Stratum information from various mining pools.
In this process, miners cannot choose which transactions to include in blocks; instead, the mining pool selects transactions and constructs templates, assigning tasks to miners.
Therefore, in the Stratum v1 protocol, we can roughly correspond the roles to the Ethereum ecosystem as follows:
Miner: Assumes the role of a partial proposer (performing hash calculations).
Mining Pool: Acts as both a builder, using miners' computed hashes, and a proposer of blocks.
What Does the Future Hold?
Some promising solutions are under development to mitigate the negative impact of MEV (Miner Extractable Value) on Bitcoin.
New Protocols
In some new mining pool protocols, such as Stratum v2 and BraidPool, miners can autonomously choose which transactions to include in blocks. Stratum v2 has been adopted by some mining pools (e.g., DEMAND) and mining firmware (e.g., Braiins), allowing individual miners to construct their own block templates. This enhances data transmission security, decentralization, and efficiency, while reducing the risk of transaction censorship and MEV on Bitcoin.
Therefore, in line with this trend, the roles of mining pools and miners in the future may not evolve in the same way as the PBS (proposer/builder separation) model in Ethereum.
Additionally, new designs related to transaction pools in Bitcoin Core may bring changes, including the widely discussed v3 transaction relay strategy and enhanced cluster mempool. However, the impact of these new designs on aspects such as the implementation of Lightning Network channel exits is still under discussion.
Mitigating the Impact of Reduced Mining Rewards
The reduction of mining rewards is a significant challenge. As block rewards further decrease in the future, it may have various impacts on the network.
Some issues have been recognized and discussed by Bitcoin developers early on, such as the fee sniping problem, where mining pools may intentionally re-mine previous blocks to capture fees. Bitcoin Core has implemented some measures to address fee sniping, but current methods still need improvement.
In addition to native transaction fees, alternative assets may also become a continued source of income in the future. Therefore, some projects are attempting to build infrastructure to more effectively identify valuable transactions involving alternative assets. For example, Rebar is developing an alternative public mempool to better identify transactions related to valuable alternative assets.
However, as discussed in the "External Fee Payments" section, the impact of these off-chain Bitcoin economic incentives on the Bitcoin self-regulating incentive-compatible system remains to be verified.
In any case, MEV on Bitcoin shares similarities with Ethereum, but also differs due to architectural and design differences. The increasing practicality of Bitcoin, the gradual reduction of block subsidy rewards, and the evolving BTCFi ecosystem will bring more attention to MEV-related factors.
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