MEV in L2s
In the latest research Arbitrum's Offchain labs proposed time boost transaction ordering in rollup sequencer, enabling back-running MEV
In the rapidly evolving world of blockchain and cryptocurrencies, few concepts have captured the imagination of researchers and enthusiasts quite like Maximum Extractable Value (MEV). MEV represents the hidden potential within every block, an opportunity for validators to reorder transactions to their advantage, often at the expense of other participants. It's a complex and controversial issue in the world of blockchain, particularly on the Ethereum network. In this article, we'll explore the recent developments that are reshaping the MEV landscape on Ethereum roll-ups.
Background: Unpacking Maximum Extractable Value (MEV)
MEV is the process of reordering transactions within a block to generate profits, at low risk, by validators. Validators have the power to manipulate the transaction order within the block.
Roll-ups, a Layer-2 scaling solution on Ethereum, have played a crucial role in improving the scalability of the network. They handle complex calculations off-chain and store the results on the Ethereum mainnet, thereby reducing gas costs significantly.
And, MEV was unavailable in the roll-up ecosystem due to the reliance on centralized sequencers.
What's New: Time-Boosted MEV
Recent research by Arbitrum has introduced a concept: time-boosted transaction ordering. This innovation brings the possibility of MEV auctions. Imagine an auction-style system where one can bid to boost transactions in his favor.
But there's a twist. This time-boosted model allows boosting transaction order exclusively through auctions, opening the door for backrunning MEV while restricting frontrunning. This is a significant departure from traditional MEV practices.
Why is this Important?
The significance lies in the distinction between frontrunning and backrunning MEV. Frontrunning MEV has often been criticized for exploiting DeFi users and excessively charging fees. In contrast, backrunning MEV, particularly in the form of arbitrage, serves as a mechanism to equalize prices between centralized exchanges (CEXs) and decentralized exchanges (DEXs), various protocols, and both Layer-1 and Layer-2 solutions.
Exploring Backrunning MEV
Backrunning MEV, also known as arbitrage MEV, can be initiated either internally or externally. Internally, it occurs when there's a significant price difference between DEXs on Layer-2, prompting arbitrage opportunities. Externally, it comes into play when prices on CEXs like Binance drop, but Layer-2 prices remain high.
A compelling hypothesis emerges from the time-boosted model: internal arbitrage will primarily be driven by DeFi protocols (e.g., DEXs) and Oracles. They are the first to detect arbitrage opportunities, leaving no room for frontrunning.
Uniswap is actively researching this area, advocating that MEV arbitrage rewards should benefit liquidity providers (LPs) at DEXs to compensate for impermanent loss.
Notably, some "MEV bots" have already partnered with DEXs, redirecting MEV arbitrage revenue to these platforms. Surprisingly, for certain DEXs, MEV arbitrage comprises the majority of their revenue today.
Conclusions: A Promising Future for Roll-ups and Oracles
In the time-boosted sequencer model, MEV auction revenue holds the potential to become a vital income source for roll-ups. Currently lacking a clear business model, roll-ups could find sustainability through this revenue stream. Similarly, oracles, which also lack a defined business model, could discover a source of recurring revenue in the world of MEV arbitrage.
The journey of MEV in blockchain is a dynamic one, marked by innovation and controversy. Stay tuned for further developments as we explore the exciting possibilities that lie ahead in the world of MEV and Ethereum roll-ups.