It's all a dark forest
A whimsical introduction to MEV for the curious (not meant to explain everything)
* I realize that I took too long to publish this & nobody on the timeline has been talking about MEV. It is what it is, enjoy. *
Some thoughts on risk & reward
I think I once read somewhere that the financial markets are a great way to discover more about yourself, albeit a very expensive method of doing so. If that’s the case, than crypto twitter and the market as a whole are the best form of psychoanalysis available.
Why do we take risk? No, not the kind where you throw a quarter of your net worth at an OHM fork - the kind that humans have been engaging in since they first showed up on Earth. Just think about all the dangerous things that exist on the planet that we don’t like, then think about the dangerous things that exist that humans continue to participate in. You know, the bad stuff versus the good stuff. Getting bit by a poisonous snake versus taking mushrooms and hoping they’re not gonna slowly kill you over the course of 10 days. That’s some real r/r.
How about Mount Everest? There are so many people that have died trying to climb Mount Everest - it’s the tallest mountain (above sea level!) and it’s seen as a feat of dedication, strength and resilience if you’ve been able to climb it. There are too many bodies to count up there, and it’s next to impossible / a waste of time trying to get them back to the ground. It’s a death sentence.
Is it worth it? Maybe. I’d rather stay at sea level and trade dog coins, but that’s just me. Either way, people like doing it because it makes their brain feel good. Brain feel good equals brain makes good chemicals equals happiness numbers go up. See? We’re all traders at heart.
How about the Stairway to Heaven in Hawaii? While not as popular as Mount Everest, I guess this place is more dangerous considering it was banned back in 1987. Or is it actually because Mount Everest rakes in money and everyone lets it stick around because rich people will say fuck it and climb the world’s tallest (above sea level) mountain? I dunno, could be psyops.
I’m straying off the nonexistent topic here, I kind of forgot this was an MEV article. As I said, humans like to take risk because it activates something in their brain that makes them feel good. Maybe it’s an adrenaline rush, maybe it’s an external source of approval that makes their wires connect in a good way. Don’t know, I’m not a climber and I don’t like heights, need someone to confirm this.
All of us on CT are in someway similar to those who scale vast mountains for the thrill of it, the ones who fight sharks in a cage, the ones that do wheelies on a motorcycle while going 100 mph. We are risk takers, yet we choose to take on this risk by levering up our accounts on Bitfinex or FTX and praying to Arthur Hayes we don’t get liquidated. True, unadulterated degeneracy.
But what about the other degenerates? What about those who operate in the shadows and engage in PvP against other geniuses? The ones whose time frames can’t be viewed on the one minute chart, time frames so small they’re only visible through code or other forms of sorcery. I think we all know who I’m referring to here.
I’m talking about the searchers. The ones who go out of their way to spend 24 hours a day trying to save out on milliseconds of time just so they can send a transaction in before some neckbeard incel who’s worth 9 figures of ETH and hasn’t left his home in 2 years. The searchers who can do things with blockchains that most of us will never understand. The ones coming up with philly cheesesteak sandwich attacks and liquidating undercollateralized loans the moment they see the opportunity.
I’m going to try and keep this article as entertaining as possible, so it won’t be very technical. If you’re looking for more of that, I’ve linked some great write-ups towards the end and throughout this piece. Go read those prior to this if you want a basic or deeper understanding of how a blockchain works & why MEV is possible.
Watch your back - we’re about to enter the dark forest.
Why don’t you go extract yourself some bitches
While researching the concept/phenomenon of MEV, I read some very good articles comparing the mempool to a dark forest. I’m almost certain that if you’re reading this article, you’ve read this great piece from samczsun, but here’s a link anyways. Oh, and this one from Dan Robinson - read this one first, I don’t want to rearrange this paragraph.
The concept of a “dark forest” in this context was popularized in the sci-fi novel ‘The Dark Forest’ by Liu Cixin. I haven’t read it, but the concept basically describes any sort of environment where “detection means certain death at the hands of advanced predators.” In the context of the mempool (the place where all the transactions wait for confirmation), those who lurk in attempt to detect their enemy are the searchers.
While searchers can operate alone, it’s commonplace for “cartels” of searchers to form. These are groups of likeminded individuals who try to look for MEV opportunities as a group. They’re called cartels because people still think MEV is stealing or whatever other term they insert. In my (not uncommon) opinion, MEV is both a necessary “evil” and a good thing. If there are ways to make a more efficient, searchers will accomplish them. Sometimes people get hurt (getting sandwiched or something else) but ultimately MEV is just a result of a blockchain’s architecture. We literally can’t help but have it.
The difficult part is navigating the forest. As @samczsun had discussed, once a transaction gets sent over to the mempool, searchers and bots and everyone in-between will pounce on it. While Flashbots has made huge strides with the advent of their private mempool and some other neat stuff, MEV still exists - the barrier to entry is just lower.
For the unaware, Flashbots is a kind of “solution” to MEV, except it’s a little bit different. It’s kind of comparable to the war on drugs, if we legalized all drugs and let everyone do whatever they wanted to. Flashbots has opened up MEV to more individuals than ever, and we’re beginning to see the effects. When MEV heats up, gas prices go up as searchers are bidding shitloads of ETH to try and win over the hearts of miners. This phenomenon is known as a priority gas auction, a situation where the highest bidder wins. It’s more complex than this, but the gist of it is that the gigabrained creators of Flashbots saw this was no good for average users of Ethereum, so they created a private arena where MEV warriors could duke it out. Pretty crafty.
I think we all know about the basic MEV strats. Whether it be an arbitrage or a sandwich (mmm) these are pretty common terms. Here’s a thread on a bunch of popular MEV occurrences that you can learn from. Nobody wants to get frontrun and nobody wants to get their arbitrage opportunity swiped out from under them. There are more “advanced” strategies like an atomic arbitrage or a flash loan, which while more complicated are still pretty well documented - anything that’s super crazy is either entirely under the radar (but still on-chain!) or a figment of our imagination. I don’t wanna bore you with a bunch of explanations over what a sandwich is or examples of arbitrage, because I know how many people have rehashed the relatively elementary concepts relentlessly. None of us wanna hear it again, we have better things to theorize over, like blockspace as a commodity.
Instead, I think this article can serve as more of a thought experiment on MEV and its role in a market. While there are varying types of MEV and a variety of searchers, the infrastructure is still there to make this a pretty broad term - maximal extractable value. While MEV was often referred to as miner extractable value years ago (and still is sometimes), I found it wasn’t the optimal definition due to the inherent definition of what MEV is. Sure, miners play a role here, but searchers are attempting to extract whatever they can out of a transaction to turn a profit - hence the word maximal just fits better and is more all-encompassing.
Because crypto on its own moves so damn fast, the profitable strategies in MEV don’t remain profitable forever. At some point, other searchers or cartels will catch up to you and take over. There’s always someone smarter and faster than you - it’s just a matter of time until they catch up. It can be beneficial to join discord servers to communicate with other searchers, though this might prove to be a waste of time. Anyone making profits off of MEV would be foolish to share their strategy, as it would be comparable to Mister Krabs sharing the secret formula with Plankton.
That’s a very -EV move for the Krusty Krab.
Developing smart contracts for MEV is vastly different than developing them for dapps (you know, decentralized applications). The contracts that win in these MEV battles are streamlined and pretty barebones, as opposed to dapp contracts that are optimized for security and ensuring every box is checked off. Because of the vast amount of constraints that could affect an algorithm’s performance, the code needs to be like this - a small error or unnecessary function could result in someone beating you by less than a second or missing the race entirely.
The optimization of code and trial & error of having to do this everyday just seems brutal to me. Sure, when you strike oil it’s great and can even be relatively low risk in some cases. I just don’t think this is a style of coding that is suited for everyone, no matter how often people tell you to start digging into MEV. For example, go read this article that goes through a lot of data - this isn’t a field for the data-shy. If you couldn’t already tell, a lot of this goes over my head.
Dystopian(ish) future of MEV
Picture a world where Ethereum has become the dominant blockchain processing 7 figures of transactions per day - MEV cartels control the blocks and represent 50% of the entire planet’s GDP. The physical version of reality has fully embraced the metaverse and we’ve entered into a ‘Snow Crash’ situation - our own personal hell we created, with a little help from Mark Zuckerberg. Imagine the possibilities at this point - how much power would miners hold, and how much influence could cartels have over them?
I think we’ve all heard about Pablo Escobar and the infamous Medellin Cartel - searcher cartels could prove to be no different, as exercising control over block organization could become as important as market making for the traditional financial markets.
With this in mind, it can be assumed that MEV never really goes away fully - there will always be inefficiencies to abstract away and a desire to re-org a block for some kind of reason. There will always be an incentive to do so, human nature almost guarantees it, assuming we aren’t dealing with a sentient AI by then. Even now, it’s in miners’ favor to operate under the conditions searchers impose upon them. The rewards from taking on searchers’ transactions are much better than anything they could earn mining blocks as they usually would.
Yes, I know that Vitalik has discussed this some and considers it to be a bit of an issue - I don’t really have an opinion on it right now. Obviously scaling and Ethereum 2.0 or whatever it’s now called is going to shake up the entire blockchain for good. Read this thread from @j0hnwang on L2 MEV and the possibilities this could bring. Didn’t you hear it’s arbitrum season, anon? For more on L2s, I’d check out the daily ape for some quality links - don’t listen to anything I have to say about it, some of that stuff is a little too giga brained for me to fully dive into.
No matter which way the markets go a month from now, it’s inevitable that we enter into a world dominate by blockchain tech. Being in crypto will be the 2087 equivalent of current day medical professional or politician - everyone will want to be you, but no one will have the degenerate capabilities to make it. Even if Wall Street types come in and try to chase us out, I don’t think we’ll go down without a fight. There’s literally too much that goes on in crypto to know everything, and the vast majority will be able to succeed in whatever niche susbet of crypto is in vogue at the time. So, I guess we have some waiting to do.
Ending on a note (it might not be a good one)
I really hate to break it to you, but there’s very little you can do to capitalize off of MEV unless you’re willing to put in hundreds (if not thousands, or even tens of thousands) of hours into it or you’re some kind of super autist that hasn’t left their room in a three days. It’s unfortunate we don’t have veMEV… yet! There is almost no alpha I can give you, other than that of knowing people are watching you like a hawk to try and steal your lunch money. One false move, and your days wandering the dark forest will come to an end.
The sad reality of MEV is that the majority of us are far too dumb to capitalize off of this. I’ve dug into a decent chunk of what these wizards do and I have to say I’ve learned very little about what it is they actually do. It just makes almost no sense to someone who’s just starting a comp sci degree, like me. I could be an idiot, but the general consensus I’ve observed is that there are a handful (maybe a few thousands, maybe less) who are profiting bigly off of MEV. Good for them.
I’ve compared it to the concept of watching YouTube videos about the ultra-niche video game ‘Dwarf Fortress’ (wen Dwarf Fortress P2E?). This is a game that was created by two very smart brothers back in 2002, a game that’s still in development to this day. It’s essentially the most ludicrous and expansive game you could ever dream of, comprised of a huge assortment of pixels that communicate medieval gameplay mixed with odd fantasy elements. Because of this game’s innate complexity, very few ever step foot into the murky waters and actually play it - look at the image below if you don’t know why this is.
It’s much more fun to watch a video summarizing a run through the game, detailing all of the zany and whimsical adventures that these dwarves went through over the course of some number of generations. The same can be applied to reading about MEV - we ain’t gonna learn it, but we like hearing about some poor sucker who tried to be the first one to ape into some new shitcoin. We enjoy hearing about the cartels that make 6 figures a day and steal money the smart way.
Most of us will probably never start learning MEV, let alone take the complicated dive into creating an MEV bot and attempting to make some money. The learning curve is just too steep and we all have the attention span of a goldfish. This is ultimate blockchain PvP you probably won’t get to partake in, but you’ll sure as hell have a fun time reading about it from accounts like @bertcmiller. Grab some popcorn and chill on the sidelines, it’s better to just watch this stuff play out if you have an IQ less than 145.
At its core, MEV is a net-positive on the crypto space. By letting turbo geniuses battle it out and minimize the number of market inefficiencies, we’re further legitimizing crypto as a functional market. Sure, they make a ton of money and it makes all of us envious - but that’s just how markets work. Just like the traditional financial markets came to be dominated by quants, algorithms, flash trading and other junk, one day we’ll be getting our lunch ate by Wall Street. Until then, 0xfemboy#99999 is going to continue to rake in more a day than your parents do in a year. Embrace the inevitable.
If you’re just getting started, @0xmebius and @EdgarArout are two accounts you should follow ASAP if you want to dig into the MEV scene a little deeper. Another good place to visit is the 0 to 1 MEV Guide (created by 0xmebius) that runs through almost everything you’d need to know to get the MEV ball rolling. Go off and do good things, or don’t. You might make some money, you might not.
I mentioned them before, but it’s worth saying again - Flashbots is doing some crazy shit and are probably one of the biggest players in the MEV “field” right now in terms of protocols. Go read their docs to get a better idea of how they operate and how you can get involved, if you’re so inclined. If you’re looking for some other interesting articles about MEV, look here, here, here and here.
While we can’t long MEV degeneracy with 100x leverage, don’t feel too down about it- you probably would have failed at that the same way you do with your other trades, anon. There are still dozens of other opportunities and sectors to abuse and lose money in, MEV is just a small subset of what’s happening market wide. Peace out.
* If you wish, follow me on Twitter @knowerofmarkets to hear me ramble & occasionally give alpha - but mostly rambling. If you’re in a generous mood, my ETH address is 0x7Db280BA0fd96619D55Cd18270435A41e25948a4. Cheers. *