Understanding the little-known MEV crisis! How Flashbots repelled arbitrage bots and reduced Ethereum transaction costs

MEV research institution Flashbots' anonymous developer Stephane Gosselin tweeted on April 11th, claiming that large mining pools have indicated to him:

"Flashbots is the main reason for the recent decrease in Ethereum Gas prices, as many traders have been forced to shut down their PGA bots."

(PGA stands for Priority Gas Auctions, which refers to "Priority Gas Fee Bidding." PGA bots can be understood as bots that, when they detect profitable transactions on the chain, bid with higher Gas Prices to prioritize these transactions.)

At the time of writing this article, Gas Price had dropped to around 60-70 Gwei, a significant decrease compared to the previous 100 Gwei. According to Stephane Gosselin, the main reason for this is the introduction of the Flashbots Alpha solution, which diverted MEV and forced PGA bots to shut down.

This article will briefly introduce Miner Extractable Value (MEV) and Flashbots, allowing readers to understand how Gas Price is influenced by both.

Overheard from a major mining pool:

"Flashbots is cause of recent low gas prices as traders shut down their PGA bots"

— Stephane ⚡🤖 (@thegostep) April 11, 2021

Miner Extractable Value (MEV)

MEV (Miner Extractable Value) refers to the profit that miners (or validators) can obtain by utilizing their ability to front-run, exclude, or reorder transactions. Generally, when there are structural arbitrage opportunities in on-chain transactions or settlements, MEV tends to accompany them.

For example, when an arbitrage bot detects a $10,000 arbitrage opportunity on a trading pair on Uniswap due to a large transaction, it submits an on-chain transaction for arbitrage to Ethereum miners at 80 Gwei Gas Price. At this point, the following two scenarios may occur:

• The miner copies the same transaction and prioritizes confirming their own transaction, seizing the arbitrage opportunity.
• Other bots notice this arbitrage opportunity and submit the same transaction with a higher Gas Price (e.g., 100 Gwei) to compete for the arbitrage rights (miners will confirm the transaction with the higher Gas Price), known as "Priority Gas Auction (PGA)."

In the above example, the potential profit of $10,000 is the MEV. Even if the miner does not seize the arbitrage opportunity, they can still profit from the Gas Price bidding of the PGA (for instance, if a PGA bot pays the miner $7,000 as a fee, this $7,000 is the additional profit the miner gains during the process).

MEV not only harms the interests of arbitrageurs but also causes many negative impacts on the overall network. The Gas bidding by PGA bots raises the estimated Gas Price when users send transactions, coupled with a sudden influx of transactions on the network, ultimately leading to a surge in overall network transaction fees. MEV concentration in the hands of a few participants due to power and capital centralization also weakens Ethereum's neutral, transparent, and censorship-resistant decentralized characteristics.

To address the network risks caused by MEV, blockchain developers and researchers have formed a neutral, unbiased interdisciplinary research organization called "Flashbots."

Pledging to Reverse the MEV Crisis - Flashbots

Established at the end of last year, Flashbots is dedicated to MEV-related research, data analysis, and solution development. Several research outcomes have been achieved, such as MEV-Inspect, which can scan Ethereum blockchain data and identify MEV activities, the MEV real-time data platform MEV-Explore, and the solution Flashbots Alpha that mitigates the MEV problem.

Flashbots Alpha Conceptual Principle

In the Flashbots Alpha solution, participants are mainly divided into "Arbitrage Traders (Searchers)" and "Miners," both of whom must use the MEV-Geth client (a forked version of the Geth client modified by Flashbots that can accept Flashbots transaction bundles and compare Flashbots blocks with regular blocks).

The former not only acts as arbitrage traders initiating transactions but also takes on the task of "searching for the highest fee transactions currently on the chain and bundling them into transaction bundles." These searchers compete with each other to find the optimal transaction sorting for maximizing profits, package them into "transaction bundles," bid against each other to persuade miners to include their transaction bundles in the next block. Miners select transaction bundles under a sealed-bid auction mechanism, generate a "block template" with transaction messages. If the miner's revenue from the searcher's "block template" is greater than the block they packaged themselves, they discard their block and select the block template for on-chain validation and mining.

In this mechanism, a dedicated communication channel is established between miners and arbitrage traders (searchers), outsourcing the transaction front-running work originally belonging to miners to searchers. What are the benefits of this approach?

• Avoiding transaction strategy leaks: Searchers themselves are arbitrage traders, and for them, as long as they include their arbitrage transactions in the bundled transactions, they can bypass the transaction pool, preventing transaction leaks to other on-chain participants.
• Elimination of price wars: Since arbitrage traders' transactions are not leaked before confirmation, PGA bots cannot detect arbitrage transactions, thereby avoiding Gas Price bidding issues, effectively reducing Gas Prices for regular users sending transactions.
• Cost-saving for searchers (arbitrage traders): Arbitrage traders can avoid the dilemma of paying miner fees in case of transaction failures.
• Miners can earn additional income: After miners select transaction bundles and successfully validate them on-chain, they can receive an additional fee called "Bundle tip" from searchers.

Flashbots Transparency Report for March

Since the release of the Flashbots Alpha version earlier this year, it has been adopted by 12 mining pools (representing over 58% of the Ethereum network's hash rate), including major pools like SparkPool and F2Pool.

Furthermore, according to Stephane Gosselin's Flashbots March Transparency Report, the number of active searchers increased from 23 in February to 90 in March, successfully validating 5,423 transaction bundles.

The percentage of Ethereum blocks containing Flashbots transaction bundles in the entire network increased from 0.83% in early March to 13.9% on April 1st, marking a 16-fold increase.

Moreover, due to the increasing adoption of Flashbots, there has been significant improvement in Ethereum blockchain's Gas fee bidding situation.

While Flashbots' solution is not perfect, the organization members state that they have scheduled it in the future roadmap, aiming to conduct in-depth research on various aspects of the problem and gradually optimize the solution. This will further reduce the risk of MEV to Ethereum and other smart contract blockchains, with the hope that the work of "searchers" can expand to general users in the future, freeing the public from the influence of bots and transaction pool mechanisms.