MEV: Merits, Drawbacks, and Its Tenacious Existence on Bitcoin

The discussion around MEV is expansive. Is it good? Is it bad? Is it illegal? Depends whom you ask.

MEV, or Maximal (or Miner) Extractable Value, is a term used in the crypto space to describe the value that can be extracted by those who verify transactions on a blockchain. In Ethereum, this value is extracted by choosing the order in which transactions are included in a block, while in Bitcoin, it can be extracted through various methods, such as mining empty blocks or accepting out-of-band payments.

The discussion around MEV is expansive. Is it good? Is it bad? Is it illegal?

It depends on whom you ask.

On the plus side, MEV is the free market figuring out the actual costs of things on blockchains by snuffing out inefficiencies which will be taken advantage of until the inefficiency approaches zero. On the minus side, MEV makes it possible for unknowing laypeople and newer users to get absolutely demolished by the experts and the power users (sound familiar?).

So far, we’ve only mentioned Ethereum because, for all its first mover advantage, MEV has historically not existed on Bitcoin. It existed in theory, but in practice it’s not economically viable (except in very specific situations).

You’re probably wondering: “No MEV? If there’s MEV for Ethereum-based AMMs then surely there’s one for the Bitcoin-based AMMs?”

And you’d be right except that there aren’t any (meaningfully sized) Bitcoin-based AMMs. That’s because Ethereum is more expressive than Bitcoin, meaning you can “do more stuff with it,” like create coins with dog mascots or other memes to trade on AMMs and become rich.

And because Bitcoin isn’t as expressive, there isn’t a thriving market or AMM for new tokens on Bitcoin. And without new, fresh non-bitcoin assets on Bitcoin how could an AMM-related MEV opportunity present itself? What exactly would you be doing? Trading bitcoin for other bitcoin?

Well, yes. This is exactly where MEV on Bitcoin has begun to present itself.

MEV on Bitcoin

MEV is nowhere close to as robust on Bitcoin as it is on Ethereum and when the topic is discussed among experts it’s always larded with caveats.

“It’s more like games you can play than MEV,” said Colin Harper, head of research and content at bitcoin mining firm Luxor Technology (no relation to the hotel in Vegas).

Three years ago, Bitcoin went through an update called Taproot, which made the network more expressive. This expressivity also accidentally made the Bitcoin equivalent of NFTs possible through Casey Rodarmor’s Ordinals protocol. This is what I mean by “trading bitcoin for other bitcoin”: “NFTs” can work on Bitcoin because the Ordinal protocol is able to see which satoshis (the smallest unit of bitcoin, a hundred millionth) are inscribed with arbitrary data which can be a picture or text or something else. These collectibles are called inscriptions so as to not be confused with NFTs (which are separate tokens). If you were buying an inscription, instead of buying an entirely new token as you would on Ethereum, you’re just buying some bitcoin that’s only special when seen through the lens of the Ordinals protocol.

This is, literally, buying bitcoin with bitcoin (buying less with more, of course). And like buying SHIB for ETH or USDC for USDT, buying bitcoin with bitcoin is an activity that can be front-run.

“When you sell inscriptions on Magic Eden or another marketplace like it, you’re using a PSBT [Partially Signed Bitcoin Transaction],” Harper explained. “The seller signs their half, and when the buyer purchases it they complete the transaction with their signature and the buyer pays the fee for the transaction. So if an NFT trader sees the transaction in the mempool, they can snipe it by broadcasting their own transaction that replaces the original buyer's payment and address with their own. To do so, they broadcast an RBF [Replace-By-Fee] transaction with a higher fee to ensure that their transaction is confirmed before the original one.”

Although this isn’t quite like the pure-play MEV as discussed in the first section of this article, it still looks like MEV: The intended buyer and seller weren’t matched because a third party came in and offered more compensation for miners in exchange for the inscription and miners maximized their own value in the transaction by accepting the third party transaction.

Other things that feel like MEV on Bitcoin

Bitcoin still has miners (read here what that means compared to Ethereum's validators) and in the business of mining there are some things happening somewhat regularly which look like MEV.

One common example is the mining of empty blocks. Periodically, a bitcoin block is mined with nothing in it. The block is useless to anyone save the miner who won the block, as no transactions which are waiting to be confirmed are verified except for the coinbase (small "c," not the