Bitcoin mining revenue streams have historically been pretty boring. Miners earn money from two sources: subsidies built into the protocol and fees for processing transactions. Sometimes a company will pay miners to put a special message in the block header. Sometimes cryptocurrency exchanges will negotiate fees with pools to reserve block space in times of high network congestion. But these payments are exceptional and rare events. Mining expenses are paid for with fees and subsidy revenue.
However, the future of bitcoin mining revenue is likely to be the exact opposite of boring. And more bitcoin investors should start paying attention – even those who aren’t mining.
Basics of Mineable Value
Minor extractable value (MEV) measures the revenue derived from block production activities that go beyond typical subsidy and fee revenue through controlling the inclusion, exclusion and ordering of transactions within a given block. Miners control all of these things – transaction inclusion, exclusion and ordering – but they are not the only ones who earn MEV.
Finders are network participants who monitor on-chain transaction activity for MEV opportunities. These opportunities are usually presented automatically to miners by finder’s bots with higher-than-usual fees associated with MEV transactions in order to join a new block by financially incentivizing the miners to do so. Value can be retrieved successfully. Thus, miners and explorers generally share the revenue from any MEV opportunity.
Readers should also be aware that there is some disagreement over what MEV means. Traditionally, the term represents miner extractable value, but some developers have recently begun to refer to MEV as max extractable value to include non-mining-specific forms of on-chain value extraction. started. (The purposes of this article are served in the context of mining-specific value extraction.)
Most readers are unlikely to have heard of MEV, with miners little understanding many of the common strategies for this source of revenue. But the mainstream financial audience is paying attention to it and bitcoin investors should too.
MEV is gaining traction
This month, the Bank for International Settlements (BIS) published an eight-page bulletin on cryptocurrency miners and MEVs. The report was notable for its surprising depth in its analysis of the mining industry, and MEV in particular, including mentioning various MEV strategies (i.e., sandwich and replay attacks) and the mechanics of block organization and production. The BIS is a global financial organization that was created in 1930 to provide banking services to central banks and other international financial institutions.
“Since when does BIS know what a ‘replay attack’ is,” tweeted Robert Miller, Head of Product at Flashbots, the industry’s leading MEV research and development organization.
But BIS is not the only mainstream entity that is aware of MEV. For example, during a cryptocurrency-focused hearing held by the Banking Committee of the US Senate last year, one man made extensive remarks about MEVs in his written testimony and in response to questions from the Senate. Acting head of the Office of the Comptroller of the Currency, Michael Hsu, also referred to the MEV last year as one of several topics that raised “difficult and inconvenient questions” for the industry.
So why should bitcoin investors care?
Bitcoin MEV Landscape
Trigger alert: 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 primary focus simply because of the number of “decentralized finance” applications and projects that currently run on that blockchain. The merits and fundamental value of those projects aside, the more applications that are built on a blockchain and the more on-chain activity they generate, the more opportunities there are for MEVs.
So – back to bitcoin – the more bullish someone is on the bitcoin-based decentralized finance (DeFi) ecosystem, the more they should consider the opportunities and threats posed by a strong MEV market. “DeFi needs bitcoin,” wrote one lawyer. MicroStrategy CEO Michael Sayler also thinks that the bitcoin protocol will play an integral role in the “next generation of DeFi”. A recent report changed (or repeated) the naming convention for bitcoin-based DeFi, calling it “LiFi” (Lightning Finance) in reference to the Lightning Network. Whatever it is called, Bitcoin’s DeFi ecosystem will grow its MEV market.
On a live stream about MEVs, explorer Nathan Worsley commented on the current and future state of bitcoin’s MEVs, saying, “Bitcoin often takes a very conservative approach to a lot of the philosophical ones. [DeFi] There are issues, so they have pushed back the development of DeFi a bit.” But as bitcoin’s DeFi ecosystem grows, Worsley added that “[MEV] The problems will become more relevant.”
MEV exists on bitcoin
The bitcoin network is not a total MEV wasteland today.
“Prefer to accept more MEVs on bitcoin than bitcoin,” said Miller on the live stream with Worsley. “And there are some MEVs in bitcoin that are not really being used by miners right now,” he said.
Lisa Negut, Lightning Network Engineer at Blockstream, led the recent conversation around the Bitcoin MEV with an article about the Lightning Network MEV. In it, she theorizes the opportunities for MEVs using the Lightning Network and (more importantly) considers how MEV discoverers in bitcoin can affect on-chain transactions for Lightning Network channels. Talking about MEV and the Lightning Network, Miller also said, “There are a lot of grief vectors where you can make money if you believe you are a counterparty in a channel and a miner.”
More Bitcoin MEVs Coming
For now, most of the MEV discovery and earning is not happening on Bitcoin. But a strong decentralized financial ecosystem running on bitcoin will change that. MEVs are a complex and not universally good or necessarily preferred aspect of on-chain activity. But bitcoin investors should pay attention to this area of their own ecosystem and recognize its growth potential. Learning from the challenges and mistakes of MEVs in other cryptocurrency ecosystems (for example, Ethereum) can prevent a lot of headache and heartache in the bitcoin economy.
This is a guest post by Jack Voel. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.