WTF is MEV Protection?

At Bebop, we offer our users a major benefit: MEV protection. But we know that MEV can be a complicated topic. In this post, we’ll break down what MEV is and how our RFQ on-chain model enables us to protect our users from it.

So, what exactly is MEV?

MEV, or maximal extractable value, is a hot topic in the crypto space. It represents a new kind of financial incentive unique to the blockchain. MEV refers to the profits that can be earned by reordering, excluding, or inserting transactions in the blocks. The order of transactions in a block can affect their outcomes and value, creating opportunities for profit.

It’s worth noting that MEV is a loosely defined term in the crypto landscape, with many people using it to describe any value that can be strategically extracted on a blockchain, such as gas bidding wars and sandwich attacks. We’ll include these in this post as well as how Bebop protects you from all of the above.

Who benefits from MEV?

There are typically two parties that benefit from MEV (Miner Extractable Value): the “searchers” and validators. “Searchers” are traders who actively seek out profitable trading strategies on the blockchain, such as front-running or back-running other traders’ transactions, as well as executing “sandwich attacks.” They utilize MEV infrastructure like mev-boost from Flashbots to implement these strategies effectively. In practice, searchers allocate a portion of their profits as tips or fee payments to validators, thereby increasing the staking APY (Annual Percentage Yield) for validators.

One common MEV strategy is the “sandwich attack.” Here’s how it works: the “Sandwicher” starts by placing a buy order for a specific asset. Once the original buyer’s order is executed, this pushes the price up higher. At this point, the Sandwicher swiftly sells the same asset at the increased price, making a profit from the price difference.

1️⃣ The “Sandwicher” anticipates a large order, buys the asset preemptively.

2️⃣ Another order executes, driving the price higher.

3️⃣ The “Sandwicher” swiftly sells at the inflated price, profiting from the disparity.

This quick transaction sequence, involving a buy order, a price push-up, and a subsequent sell order, is executed atomically in a block, resulting in a secure profit for the Sandwicher.

In other cases, developers or users can also extract MEV by creating or using smart contracts that are designed to benefit from specific transaction orders or behaviors.

While the concept of MEV can be complicated, the key takeaway is that the profits from MEV can be significant. According to Flashbots, a total of $1.33 billion was extracted in MEV on the Ethereum network in 2021 and $1.74 billion in 2022. Unfortunately, this profit is often concentrated in the hands of a few large actors who have access to specialized tools and information.

Why do traders want protection from MEV?

The pursuit of profits through MEV can have detrimental effects on the broader DeFi ecosystem. MEV introduces inefficiencies, unfairness, and instability within the system. One significant concern is the risk of centralization, as larger actors may exploit their advantages to extract more value from the system, potentially at the expense of smaller participants.

MEV can negatively impact user trades through poor execution. When MEV strategies, such as front-running or back-running, are employed, it can disrupt the intended execution of trades for individual users. This interference can lead to suboptimal outcomes, reduced returns, or even losses for traders, undermining trust and confidence in the decentralized trading environment.

Given these risks and drawbacks, traders are motivated to seek safeguards and protective measures against MEV, aiming for a more equitable and efficient DeFi ecosystem that ensures fair execution and equal opportunities for all participants. This is particularly important for those who do not have the knowledge, tools, or resources to compete with larger market players. By using MEV-resistant trading strategies or tools, such as limit orders or RFQ models like Bebop’s, traders can reduce the impact of these transactions.

How does Bebop protect you from MEV?

Bebop utilizes an RFQ (Request for Quote) on-chain model to protect users from the negative effects of MEV, including sandwich attacks and front-running.

In the RFQ model, a user submits a request for a quote to one or more private liquidity providers on Bebop, which then respond with quotes for the requested trade. The user can then select the best quote and execute the trade with the chosen provider.

By conducting the quote process off-chain, Bebop reduces the chances of MEV extraction by actors through manipulating transaction order. The RFQ model guarantees the price for our users, regardless of where that transaction falls in a block.

In contrast, execution via AMMs is always prone to price fluctuations and thus have greater opportunities to extract MEV by observing and manipulating transaction orders. They can also see the transaction that’s about to happen, and insert their own transactions to take advantage of the price change caused by the initial transaction.

The RFQ on-chain model in Bebop provides a more fair and transparent trading experience for users by reducing the impact of MEV and other manipulations. The price that you see quoted on Bebop is the price that you will get executing your transaction, and gas is already included in that price. Our guaranteed prices keep our users from being exploited by MEV-bots or others that know how to profit from this system.

Conclusion

MEV has both positive and negative implications for the blockchain ecosystem. On one hand, MEV can incentivize validators to prioritize certain types of transactions or to take actions that improve the overall efficiency and security of the network. On the other hand, MEV can also lead to inefficiencies, unfairness, and even security risks if it is not properly managed or distributed among market participants.

As the DeFi space continues to grow and evolve, MEV has become increasingly relevant as a key driver of market dynamics and competition. As a result, many researchers, developers, and investors are exploring ways to better understand and address the challenges and opportunities of MEV in order to build more resilient, efficient, and equitable blockchain systems.

At Bebop, we have implemented an innovative RFQ model that addresses many of the concerns surrounding MEV and provides a more secure and fair trading experience for our users. With our model, users can enjoy transparent and guaranteed prices, without the fear of being exploited by MEV or other manipulations.

If you’re interested in trying out our platform, visit bebop.xyz today. You can also join our Discord and follow us on Twitter to connect with our team and the wider community. Happy trading!