Since DEFI became popular last year, the transaction fees on the Ethereum blockchain have also risen. For a while, a large number of DEFI projects spilled over to BSC and HECO, and this also made EIP-1559 the focus of the community.
Whether EIP-1559 can solve the problem of Ethereum's high transaction fee, many people may not be able to see this clearly. The miners represented by the Spark Pool came out to oppose it for the first time, which made the debate more intense. However, after the failure of the hashrate demonstration in early April and everyone's careful analysis of the incident, it was discovered that there is still a new world hidden here, that is, MEV.
In short, MEV is an arbitrage mechanism on the blockchain. It first appeared in 2018. Of course, this model mainly relies on the arbitrage of transactions such as smart contracts and DEX. Since the development of the bull market in 17 years has spawned a large number of emerging projects, many decentralized DEX and exchange agreements have also begun to appear in front of people. It is also since then that MEV has actually existed.
MEV did not attract the attention of the currency circle before. In fact, it was mainly because the frequency of transactions on the Ethereum chain was quite low. DEFI was still based on Maker DAO at the time. As a result, the development of MEV was actually not smooth, and the arbitrage opportunities were naturally low. A lot.
As the transaction modes such as uniswap gradually attracted the attention of users, MEV began to flourish. From the current point of view, behind the high transaction fees of Ethereum, it is very likely that MEV is the pot.
How does MEV work?
Here we will talk about the arbitrage trading and high-frequency trading of traditional centralized exchanges. If you have experienced a trading pair with a relatively small transaction amount in traditional exchanges, especially small exchanges, you will actually find one to buy one. The price difference between selling one and selling one will be relatively large, and this phenomenon is actually a manifestation of the real market. In order to make the currency price fluctuate normally, the project party will generally seek some market makers to cooperate, and the market makers use the method of machine pending orders to provide liquidity for project token transactions. There is also another way of this method. The popular name is the amount of brushing.
High-frequency trading is also a similar method of scalping. In fact, most market makers use high-frequency trading. They use the advantage of time to buy at higher than the user’s pending order, and then force the user to withdraw the previous order. Pending orders, buy at a higher price, so that a wave of profitable operations can be completed. The handling fees of high-frequency trading are generally negotiated by institutions and exchanges, and the handling fees are also particularly low. Even because of the factor of providing liquidity, some exchanges even implement preferential measures for such teams to waive handling fees. , Then in this way, high-frequency trading flourishes in the currency circle.
So when we talk about MEV, it is actually equivalent to the high-frequency and arbitrage trading of the decentralized exchange version, but the decentralized exchange and centralized trading are all different, that is, the TPS of the decentralized exchange is There are certain restrictions, so there will be congestion here, and then the arbitrageur needs to calculate the relationship between the cost of the transaction fee and the money earned by the arbitrage transaction amount to evaluate this time. Whether the transaction is worth it.
Another thing to note is that in the process of decentralized trading, this arbitrage trading model is actually more beneficial for two main reasons:
Handicap spreads will be larger than that of centralized exchanges. Generally, 5% may be a very common phenomenon. Therefore, this part of the profit is actually relatively large, which provides a living environment for MEV.
In the case of large profits, traders generally need to have a certain amount of rush ability. In a centralized exchange, generally everyone can place and cancel orders at any time, and there is almost no cost here. However, in decentralized exchanges, both cancellation and pending orders have costs, so what MEV needs to do is to be able to buy pending orders at a higher price than users, and then use the slippage of the AMM trading mechanism to sell to later Buyers.
But the risk that needs to be paid attention to here is the packaging ability of miners. Miners need to package transactions in a specific transaction order to increase the success rate of MEV. That is to say, MEV actually needs the cooperation of mining pools to make real profits.
We all know that the mining pool can decide the order of packaging transactions by itself, and if the MEV transaction is packaged before the normal transaction, then this arbitrage has been successful. If it falls behind, it may fail. From this point of view, MEV is not 100% profitable, it also has a certain probability, and mining pools have higher motivation to carry out MEV arbitrage trading, which is why.
It should be noted here that we are talking about mining pools, not miners. Generally, the MEV profit of a mining pool is the part after deducting various handling fees, and even if it fails, the actual loss will be less than the cost of handling fees (premise It is that the computing power accounts for a large enough).
Will MEV arbitrage fail?
Although MEV transactions seem to be in the hands of mining pools, and they can also obtain certain expected arbitrage opportunities, and they are all carried out in a procedural way, it can almost be said that this is an opportunity to make money, but the actual situation is There are also cases of arbitrage failure in MEV.
This situation is generally due to currency price fluctuations on the one hand, and on the other hand, there are also arbitrageurs for MEV transactions. Of course, due to the complicated mechanism, we will not discuss this for the time being. Regardless of the reason, the reduction of MEV, in certain respects, people have seen that it has indeed had an effect on the reduction of Ethereum's transaction fees. Then this has shown that the previous arbitrage transactions are quite common, then the final war may be Turning to a confrontation between MEV and MEV terminator, it can be expected that MEV transactions on the chain will also decrease a lot later.
In fact, no matter what the ending is, at least one thing is proved, that is, the increase in the transaction fee of Ethereum is actually due to the increase in transaction volume. For the miners, at most they may only earn the procedure of MEV rushing away in the transaction. Fees, and the real profit part may be obtained by the owners of mining pools and MEV trading robots. But no matter what, MEV also operates under the rules, so if all the reasons for the high handling fee are attributed to this, this is also an extreme approach.