Anyone following recent drama concerning the workings of the Ethereum ecosystem might reasonably imagine that the notion of MEV is a new phenomenon. It turns out, it’s a story as ancient as human greed itself.
OK, maybe not quite that old, but older than you might expect.
One example can be traced back to an event in the year 1834, often referred to as the world’s first cyberattack.
“Wait. A cyberattack… in 1834?” one might ask incredulously. Seems like a bit of a stretch. The details of the story vary from one account to another, but the gist of it can be summed up as such:
A pair of brothers — François and Joseph Blanc — discovered a clever method to front-run government bonds trading in Paris, France. Upon receiving news days later via postal services, Bordeaux stock exchange traders would follow the previously-set patterns in Paris.
The brothers came up with an ingenious trick to learn of the trades before anyone else in the town did — and earned enormous profits by doing so.
A government-operated semaphore telegraph system involving a series of signaling towers and telescopes could relay messages across the countryside in hours rather than days. Problem being, the operation was exclusive to government communications.
But a little bribery landed the brothers a couple of accomplices — one of whom dropped what appeared to be errors into government-directed messages — and one of whom deciphered these “errors” down the line as coded secrets about trades as they took place back in Paris.
The scheme worked phenomenally, at least for about two years. The brothers were eventually caught when one fell ill. As a result of his illness, he was forced to share the ploy with others who could act in his place, according to some accounts. Upon learning of the trick, these third-parties allegedly revealed it to authorities, who then took action to end the arrangement for good. The Blancs were never punished for their actions however, because no laws existed to protect against such trading behavior.
“All is fair in love and MEV”
Traders today continue this sort of system-gaming, only with internet cables and computers instead of semaphore towers and telescopes.
MEV searchers are at the nexus of this activity in today’s blockchain economies — and code is the only law they need to consider.
On a recent Bell Curve podcast, Dialectic co-founder Dean Eigenman and independent MEV searcher Anish Agnihotri spoke to Blockworks about the ruthlessly competitive environment of MEV in blockchain protocols.
“All is fair in love and MEV,” Eigenman observes.
Much of the day’s work is scouring for data and optimizing code that can give his team an edge, he says. And unlike the multi-hour telegraph journeys of information, these advantages are in the milliseconds over high-speed networks.
It often boils down to a fierce battle between parties, all trying to seize the maximum extractable value, he explains. After examining their smart contracts and analyzing the way competitors send transactions, Eigenman’s approach is often to “push them out” in a war of attrition, causing opponents to give up when their methods are no longer profitable.
Smaller competitors don’t enjoy the same 24/7 coverage and are unable to optimize their strategies to react to everything that’s happening on the network, Eigenman explains. “Whereas, we do. I like to burn out competition and corner them as much as possible.”
In addition to reducing network latency, “you inevitably have to do optimizations elsewhere,” he says, “making sure your code is the fastest.”
The same formula, centuries later
Agnihotri compares blockchain MEV practices to advancements in traditional finance. “What works in the traditional world with centralized exchanges is basically a one-to-one mapping to how it is in MEV.”
It still comes down to getting information before competitors, Agnihotri says. In the world of HFT (high-frequency-trading) in traditional finance, factors that contribute to winning are optimized code and efficient networking stacks, as well as “how quickly can you ingest transactions, how quickly can you emit orders, how quickly can you cancel orders, and how much exclusive order flow you have from venues like Robinhood.”
“That’s identical to what makes you successful in crypto,” Agnihotri says, “save for perhaps your crypto nativity and how deep you can go into protocols.”
“Other than that, it’s: How close am I to the sequencer? How quickly can I ingest transactions? How much of the validator network do I see? How close to them am I? Do I have exclusive order flow from some dapps?”
“So yeah, for me, it’s mostly the same thing.”
“In the end,” Eigenham says, “I think that a lot of this stuff is going to professionalize.”
“A lot of strategies from Trad-Fi are going to roll over into how some of this stuff is done.”
“MEV today is reapplying the same things that HFT and the traditional world has seen 10, 15 years ago,” Agnihotri observes, “but just doing it in a more decentralized and publicly auditable way.”