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Ask most active crypto traders to define MEV, and they’ll likely recall the acronym ‘Miner Extracted Value’ or use a phrase like ‘the money that miners make by cheating at DeFi.’
Ask a more sophisticated user, and they would define it as ‘Maximal Extractable Value’ or the money made from block production by reordering, censoring, or adding transactions.
Finally, ask almost anyone if MEV occurs on Bitcoin, and they’ll probably say no, MEV is mostly on Ethereum or Solana. However, MEV does exist on Bitcoin. In fact, Bitcoin is the first blockchain that had MEV.
MEV on Bitcoin #1: Full RBF
In modern mempools — queues of transactions awaiting inclusion in a block — modern pool operators select the transactions that bid the highest transaction fees. This wasn’t always the case.
Bitcoin’s first block construction policy was First Seen, an altruistic policy by early miners who believed that it was worth sacrificing a bit of profit in order to provide a better experience to merchants accepting bitcoin payments.
At the time, the Bitcoin community was concerned about small business adoption, with ‘Bitcoin Jesus’ Roger Ver evangelizing bitcoin point-of-sale terminals and apps to business owners. In order to make their experience of receiving an on-chain payment more seamless, miners vowed to include transactions in the block in their received order.
‘First Seen’
Because the mining policy was First Seen, merchants could simply monitor a public mempool, see that the customer broadcast a valid transaction, and render the good or service immediately — trusting that miners would include the customer’s transaction in the next block, even if it took an average 10 minutes to mine each one.
Although this policy benefitted merchants, the First Seen policy was ludicrously altruistic. Soon, rogue miners started accepting Replace By Fee (RBF) transactions, thereby overriding a First Seen, lower fee-bidding transaction with a ‘later seen,’ higher fee-bidding transaction.
This was the first instance of MEV on bitcoin. Mining pool operators began searching for RBF to maximize profitability.
As a practical definition, MEV is the extra money available from producing blocks by overriding the defaults of node software. By manually rewriting their Bitcoin Core node to prioritize higher fee-bidding transactions, these RBF miners earned Bitcoin’s first MEV.
Soon, the simple economics of this practice overtook a majority of the Bitcoin network. Full RBF became commonplace, deprecating First Seen entirely. By default, bitcoin mining pools now honor RBF flags and accept higher fee-bidding transactions, even if valid, conflicting transactions arrive earlier.
Early bitcoin miners would call today’s commonplace practice of Full RBF to be Miner Extracted Value. Nowadays, people consider it standard practice.
Read more: US indicts Ethereum validators for exploiting MEV trader
MEV on Bitcoin #2: Out-of-band payments and non-standard transactions
There is another method for bitcoin miners to earn MEV: rewriting the defaults of their full node to include non-standard transaction types when constructing blocks.
Consider block 774,628, a non-standard block produced by mining pool Luxor which contains only one transaction, a 3.94MB picture.
The picture, a modified version of the ‘Magical Internet Money’ meme from the r/Bitcoin Reddit, was an advertisement for an NFT collection. The community dubbed Luxor’s block, containing the largest transaction in Bitcoin history by file size, ‘The Big Wizard.’
There were two non-standard characteristics of this block. First, Luxor manually overrode its node defaults to allow a single transaction to exceed Bitcoin Core’s then-customary size limit. The transaction used a clever amalgamation of Bitcoin’s Taproot and SegWit upgrades to stuff an enormous amount of image data into a single transaction.
Although the transaction was valid according to consensus rules, the miner had to manually construct a block to accommodate its non-standardness.
Second, The Big Wizard paid only a couple hundred dollars (0.009 BTC). Instead of bidding according to the customary, on-chain process, this user paid Luxor outside of the transaction (in cash, via another transaction, or otherwise). Censoring other transactions to include a lower fee-bidding transaction because of an out-of-band payment is MEV.
Again, MEV is the extra money available from producing blocks by overriding the defaults of node software. In this case, Luxor received MEV not only by manually overriding file size defaults but also by receiving out-of-band payment.
MEV on Bitcoin #3: Stacks reward
A third-party blockchain, Stacks, has a peculiar auction that allows bitcoin miners to earn MEV. The relevant details are simple. Stacks has its own blockchain that pays a reward in its native token, STX, to users who contribute bitcoin to its auction wallets.
Miners discovered this simple process and quickly began extracting value. The path to profit was simple: censor others’ bitcoin contributions, contribute a trivial amount, win the auction, and sell the STX payout.
Censoring others’ bitcoin transactions to prioritize miners’ transactions to extract value from an on-chain auction is a quintessential form of MEV on Bitcoin.
MEV on Bitcoin #4: Stealing free mints
The fourth type of MEV on Bitcoin occurs in one of the newest categories of bitcoin transactions: Ordinals. Ordinals software allows Bitcoin users to mint and trade fungible tokens like ORDI or non-fungible token collections like Bitcoin Frogs.
Founders of both fungible and non-fungible often promote their collections with a free mint: an opportunity for users to create an Ordinal without paying any fee or royalty. This provides them with an instant profit if the collection is listed at any price above their round-trip transaction fee on a secondary marketplace.
Free mints also enable another form of MEV on Bitcoin.
Mining pool operators, operating their own mempools and easily able to scan for mint transactions in real time, can easily censor minting transactions and replace them with their own.
Sure, some Ordinals founders create rules to limit the number of free mints available at certain times or wallets, so not every free mint is fully vulnerable to MEV. Nevertheless, many free mints provide MEV opportunities to miners — especially popular and long-running Ordinals collections that have quick listings on secondary exchanges.
Similarly, many fungible Ordinals are listed on multiple, decentralized exchanges. If a Bitcoin user places an order that a miner can front-run, back-run, or sandwich, this is also an obvious vulnerability to MEV.
MEV on Bitcoin is concerningly centralizing
MEV is concerning not only because it steals money from everyday users but also because it’s a powerfully centralizing force. Indeed, MEV is a sophisticated suite of financial trading strategies. Counteracting MEV requires even more complicated software, infrastructure, and R&D expenditures.
Long-time Bitcoiner Eric Wall summarized the four types of MEV that are making bitcoin miners extra profit, outlined and expanded in detail above.
Because MEV rewards quantitative traders, high finance, and other Wall Street-type behavior, MEV steadily extracts money and power away from average users into the biggest mining pools.
In other words, MEV exists on Bitcoin, and that’s not good for decentralization. Sure, the dollar value of MEV on Ethereum and Solana is much larger than on Bitcoin. Nevertheless, as layer 2s, sidechains, DEXs, and other types of Ethereum-like projects join Bitcoin, MEV will increase — and with it, centralization.