One of the culprits of high fees: How MEV affects transactions on the Ethereum chain

Since DEFI became popular last year, the transaction fees on the Ethereum blockchain have also risen, and a large number of DEFI projects have overflowed to BSC and HECO for a while, and this has also made EIP-1559 the focus of community attention.

Whether EIP-1559 can solve the problem of high transaction fees in Ethereum, this may not be clear to many people, and the miners represented by Spark Mining Pool immediately opposed it, which made the debate more intense. However, after experiencing the failure of the computing power demonstration in early April and everyone’s careful analysis of the incident, it was discovered that there is still a new world hidden here, that is MEV.

In short, MEV is an arbitrage mechanism on the blockchain. It first appeared in 2018. Of course, this model mainly relies on the arbitrage of transactions such as smart contracts and DEX. Due to the development of the 17-year bull market, a large number of emerging projects have been spawned, and many decentralized DEX and exchange agreements have also begun to appear in front of people. It is also since then that MEV has actually existed.

Elon Musk: There is a possibility of bankruptcy at Twitter: News on November 11, with the departure of Twitter executives, Elon Musk warned that although he is trying to control Twitter's financial situation, the platform still has the possibility of bankruptcy .

In addition, the U.S. Federal Trade Commission (FTC) said it was paying close attention to Twitter's latest developments, because it promised to protect user data under the consent agreement signed by Twitter in 2011, and the regulator will continue to monitor it. (Financial Times) [2022/11/11 12:49:53]

MEV did not attract the attention of the currency circle before. In fact, it was mainly because the frequency of transactions on the Ethereum chain was quite low. DEFI was still dominated by Maker DAO at that time. In this way, the development of MEV was actually not smooth, and the arbitrage opportunities were naturally low. a lot.

With the uniswap and other trading models gradually attracting users' attention, MEV has also begun to flourish. From the current point of view, behind the high transaction fees of Ethereum, it is very likely that MEV is the pot.

Exmo development director: Russia's use of cryptocurrencies to circumvent sanctions is an illusion: Jinse Finance reports that Russia is preparing to authorize international cryptocurrency payments, but those involved in the industry doubt whether this will allow the country to evade sanctions. Meanwhile, the U.S. recently passed new legislation in Congress targeting the use of cryptocurrencies to circumvent financial restrictions imposed by Western countries.

Recently, Russian authorities announced that they have begun to develop a mechanism for cross-border settlement with cryptocurrency assets, with the aim of reducing the pressure of sanctions on the Russian economy and trade. The introduction of a cryptocurrency payment system under sanctions is a huge fantasy, said Maria Stankevich, director of development at digital asset exchange Exmo.

Mikhail Zhuzhalov, a senior lawyer at law firm Tomashevskaya & Partners, said that regulatory pressure is usually exerted on institutional players such as cryptocurrency exchanges, P2P platforms and issuers of digital and tokenized assets. He pointed out that although the circulation of cryptocurrencies itself is not regulated, it is easy to attack licensed companies that operate legally. (Bitcoin.com) [2022/9/26 7:21:22]

How does MEV work?

Encrypted data infrastructure platform Goldsky completes $20 million in seed round financing: Jinse Finance reported that encrypted data infrastructure platform Goldsky completed a $20 million seed round of financing led by Felicis and Dragonfly Capital. Entrepreneur Elad Gil, Plaid founder Zach Perret, William Hockey, Uniswap Labs, 0x Labs, Magic Eden's Zhuoxun Yin, Azuki's Alex Xu and Compound Finance's Robert Leshner participated in the round. (The Block)[2022/9/13 13:24:58]

Here I will talk about the arbitrage trading and high-frequency trading of traditional centralized exchanges. If you have experienced a trading pair with a relatively small transaction amount in traditional exchanges, especially small exchanges, you will actually find that buying a The price difference between the price and the selling price will be relatively large, and this phenomenon is actually a manifestation of the real market. In order to make the currency price fluctuate normally, the project party usually seeks some market makers to cooperate, and the market makers use the method of machine pending orders to provide liquidity for the project token transaction. This method also has another In popular terms, that is brush volume.

Slow Mist: American actor SethGreen's NFT was attacked by phishing, and the funds have been cross-chained to BTC and mixed currency: On May 18th, American actor SethGreen suffered a phishing attack and caused 4 NFTs (including 1 BAYC, 2 MAYC and 1 Doodle) was stolen, and the phisher’s address has sold all NFTs, making a profit of nearly 160 ETH (about 330,000 US dollars).

After analyzing the phishing addresses starting with 0xC8a0907, SlowMist MistTrack found that a total of 8 users’ NFTs were stolen, including 12 types of NFTs such as MAYC, Doodle, BAYC, and VOX. After all of them were sold, the total profit was 194ETH. At the same time, the initial capital of this phishing address is 0.188ETH from Change NOW. The phisher’s address converted most of the ETH into renBTC and cross-chained to 6 BTC addresses, and about 14 BTC were transferred through currency mixing to avoid tracking. NFT phishing is everywhere, please remain skeptical and vigilant. [2022/5/18 3:24:23]

High-frequency trading is also a similar method of brushing volume. In fact, most market makers use high-frequency trading. They use the advantage of time to buy at a level higher than the user's pending order, and then force the user to withdraw the previous order. A pending order to buy at a higher price, so that a wave of profitable operations can be completed. The handling fee for high-frequency trading is generally negotiated between the institution and the exchange, and the handling fee is also very low. Even because of the factor of providing liquidity, some exchanges even implement preferential measures for such teams to waive the handling fee , Then in this way, high-frequency trading is booming in the currency circle.

So when we talk about MEV, it is actually equivalent to the high-frequency and arbitrage trading version of the decentralized exchange, but there is one difference between the decentralized exchange and the centralized exchange, that is, the TPS of the decentralized exchange is There are certain restrictions, so there will be congestion here, and then arbitrageurs need to calculate the relationship between the handling fee cost required to complete a transaction and the money earned from the arbitrage transaction amount, so as to evaluate this time. Whether the transaction is worth pursuing.

Another thing to note is that in the process of decentralized trading, it is actually more beneficial to this arbitrage trading model. There are two main reasons:

1. The price difference of the order book will be larger than that of the centralized exchange. Generally, 5% may be a very common phenomenon, so this part of the profit is actually relatively large, which provides a living environment for MEV.

2. In the case of large profits, traders generally need to have a certain ability to rush ahead. In centralized exchanges, everyone can generally place and cancel orders at any time, and there is almost no cost here. However, in a decentralized exchange, there are costs for canceling and placing orders, so what MEV needs to do is to buy pending orders at a higher price than users, and then use the slippage of the AMM trading mechanism to sell them to later buyer.

But the risk that needs to be paid attention to here is the packaging ability of miners. Miners need to package transactions in a specific order to improve the success rate of MEV.

We all know that the mining pool can decide the order of packaged transactions by itself, and if the MEV transaction is packaged before the normal transaction, then this arbitrage will be successful. If it falls behind, it may fail. From this point of view, In fact, MEV is not 100% profitable, it also has a certain probability, and mining pools have a higher motivation to conduct MEV arbitrage transactions, which is exactly the reason.

It should be noted here that we are talking about mining pools, not miners. The MEV profit of a general mining pool is the part after deducting various handling fees, and even if it fails, the actual loss will be less than the spent handling fees (premise is a large enough computing power).

Will MEV arbitrage fail?

Although MEV transactions seem to be in the hands of mining pools, and they can also obtain certain expected arbitrage opportunities, and they are all carried out in a procedural way, that is, it can almost be said that this is an opportunity to make money, but the actual situation is MEV also has arbitrage failures.

This kind of situation is generally due to the fluctuation of the currency price on the one hand, and on the other hand, there are also arbitrageurs targeting MEV transactions. Of course, due to the complexity of its mechanism, it will not be discussed this time. No matter what the reason is, the reduction of MEV, in a certain way, people have seen that it has indeed had an effect on the reduction of Ethereum’s handling fees, so this has already shown that the previous arbitrage transactions are quite common, so in the end this war may come to an end. Turning into a confrontation between MEV and MEV Terminator, it can be expected that MEV transactions on the chain will also decrease a lot in the later stage.

In fact, no matter what the ending is, at least one thing has been proved, that is, the increase in Ethereum transaction fees is actually caused by the increase in transaction volume. Fees, while the real profit part may be obtained by mining pools and MEV trading robot owners. But in any case, MEV is also operating under the rules, so if all the reasons for the high transaction fee are attributed to this, this is also an extreme approach.

Tags：

Ethereum Price USD