Estimating Ethereum MEV Using Transaction Ordering Payments
- greg95594
- Oct 3, 2022
- 4 min read
Updated: Nov 30, 2022
Summary
Existing estimates of Ethereum maximum extractable value (MEV) investigate specific transactions. This bottom-up approach overlooks multi-transaction and cross-domain MEV, for instance, cross-chain arbitrage.
In this study, we take a top-down approach and estimate Ethereum MEV using transaction ordering payments. We find that popular MEV estimates are a fraction of the total Ethereum transaction ordering market size. Consequently, the leakage of economic value from users and applications in the Ethereum ecosystem as well as the value of reducing such leakage, have been dramatically underestimated.
Maximum Extractable Value (MEV)
Daian et al introduced the concept of Miner Extractable Value (MEV) in 2019. MEV was defined as the value of including and ordering blockchain transactions.
This MEV concept has since been generalized to Maximal Extractable Value. This value is ultimately capturable by entities with control over transaction flow, which includes wallets, miners, validators, sequencers, and applications themselves. The concept of MEV thus generalizes beyond single block production to a wider supply chain originating with user intent and ending with a finalized blockchain state.
Estimating Ethereum MEV
Most analyses of MEV focus on identifying exploitable user transactions (front-running, sandwiching) and single-transaction MEV capture (arbitrage and liquidations).
Such efforts have known limitations generally acknowledged by the authors:
Our current methodology only accounts for single-tx MEV opportunities. This means sandwich trades are not accounted for (yet). However, if any part of a sandwich trade is an arbitrage, the arbitrage will be picked up by our inspectors.
… Arbitrage trades between centralized and decentralized trading venues are not tracked nor quantified given the opaqueness of the CEX part of CEX-DEX arbitrage.
Overlooking multi-transaction and cross-domain MEV significantly understates Ethereum MEV size and understates the returns to solutions that retain MEV within application ecosystems.
Curious about the alternative estimates of Ethereum MEV, we decided to study the total size of the Ethereum transaction ordering market.
Methodology
We analyzed all Ethereum transactions between block 12965001 (2021-08-05 12:33:55 UTC) and block 15366425 (2022-08-18 17:56:20 UTC). This covers roughly a year after the release of EIP-1559 which significantly changed the gas market model.
For each block, we defined the following values:
Inclusion gas price: The gas price required for including a transaction in a block. This study uses the 50th percentile of effective gas prices for transactions included in a given block – half of the transactions paid a lower gas price.
Gas ordering payment: The gas cost of a transaction above its cost using the inclusion gas price.
Miner transfer payment: A direct transfer to the miner of the block. This is a common mechanism for paying miners through non-gas mechanisms.
Total transaction ordering payment: The sum of gas and non-gas payments to the miner of a block over that required for the block inclusion. This is consistent with the canonical definition of single-block MEV. Transaction ordering payments comprise gas ordering and miner transfer payments.
MEV Transaction Examples
Below are examples of specific transactions that appear to pay miners for transaction ordering. These payments should be less than the underlying MEV to leave some non-zero margin for the traders:
Multi-DEX arbitrage: Executing transactions over multiple DEX pools and potentially multiple protocols at a profit. These are blockchain versions of triangular arbitrage from traditional finance. Most analysis of MEV readily identifies this and similar trades and associated MEV: https://etherscan.io/tx/0xb72689042f313adbffbe4d192b0febc4c8a8346b75a549d5b4d4795b37180488
Cross-domain arbitrage: Executing transactions across multiple blockchains and centralized exchanges at a profit. A common version is a centralized exchange (CEX) - decentralized exchange (DEX) arbitrage. Most analyses of MEV overlook these transactions as they are unable to see the off-chain leg. The following transaction appears to be an on-chain leg of such a cross-domain arbitrage exploiting stale ETH/USD price as it pays the miner (Ethermine) a tip: https://etherscan.io/tx/0xf6837be1aaee9e20de5a1e241370b80357371e64fa10852fe84eb1e8766dbf7d.
Protection payments: Perhaps the sender of the above transaction 0xf683 is not engaged in arbitrage and is instead paying the miner for other reasons. For instance, the user may want protection from front-running. Regardless of why the user seeks transaction ordering within the block, the excess payment is a transaction ordering payment, and a form of MEV.
Findings
We estimate total Ethereum transaction ordering payments over the study period (2021-08-05 – 2022-08-18) at ~$1.2 billion. Of this, ~$400 million has been paid directly to miners via mechanisms like the Flashbots’ coinbase transfer, which circumvents the usual gas market and EIP-1559 mechanics.
Flashbots’ MEV-Explore identified approximately $130 million as cumulative miner payments for MEV over this period. We find that total miner transfer payments over this period have been nearly three times larger. Total transaction ordering payments including gas payments have been roughly ten times larger.
Furthermore, Flashbots estimated that MEV miner income was 36% of the total MEV. Assuming transaction ordering payments above capture a similar share of the total MEV, these payments imply MEV is 2-3 times larger than the transaction ordering payments.
Ethereum MEV varies with the level of activity and market regimes (LINK). This variation is visible in the variable slope of the cumulative payment chart above. To better illustrate this, we consider annualized 30-day transaction ordering payments:
At the peak of DeFi activity in late 2021, annualized Ethereum transaction ordering payments exceeded $3 billion. The total annualized MEV at this time likely reached multiples of that figure.
Conclusions
Ordering payments above those required to include transactions on blockchain provide an aggregate estimate of Ethereum MEV without the need to correctly identify specific MEV-related operations.
Annualized Ethereum transaction ordering payments range between $0.5 billion and $3 billion over the past year, depending on the level of economic activity on the blockchain.
Common analysis of Ethereum MEV considers specific transactions and overlooks the value of cross-chain transactions, understating the total MEV by a factor of 3-10.
Cross-domain MEV likely already dwarfs within-chain MEV.
The value of capturing MEV within applications and reducing the leakage of cross-domain MEV is far larger than generally believed.
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