A few weeks ago, while looking at the transaction revert data of L2s on Dune, I noticed something strange.
It turns out that Arbitrum had the highest transaction revert rate among major L2s. If Timeboost was functioning well, this shouldn't have happened.
Why did this happen? 🧵
Spam is one of the superior strategies for extracting MEV on fast blockchains. Since the fees are very low, it involves indiscriminately submitting transactions, assuming that 'there will be opportunities.' Even if a transaction fails, you only pay a very low fee, so from the perspective of arbitrageurs, it's a strategy with no downsides.
Through the research of Flashbots, we can confirm how this phenomenon is actually occurring. The example below is a real failed transaction from the base, and if we look into the trace of this transaction, we can see that it is performing MEV searching 'on-chain'.
This happens because the L2 mempool is generally 'private'. Instead of waiting for the block to be built by the sequencer and propagated to perform arbitrage, it is a strategy to perform arbitrage within the same block as the transaction that is the target of the arbitrage before that.
In fact, this has been a problem for many mainnets. Last year, when meme coin trading was active, Solana experienced a situation where the network's bandwidth could not handle the spam transactions.
Currently, major L2s like Base, Arbitrum, and the OP mainnet are also experiencing active spam transactions.
However, many chains have implemented MEV auctions. Notably, there are auctions through priority fees in the OP Stack (PGA) and Arbitrum's TimeBoost. All of these sell the right to prioritize transactions in blockspace through a specific form of auction.
If this form of auction works perfectly, and participating in this auction becomes the top strategy for all arbitrageurs, there would be no incentive to spam. Nevertheless, the occurrence of spam transactions indicates that the above auction is not perfect.
This situation is not very desirable from two perspectives.
1. User Perspective - Increased Fees
When MEV opportunities surge, MEV bots send a large number of spam transactions at that moment. Due to the nature of the fee mechanism in EVM, this spam leads to an increase in base fees. As a result, even regular users who have nothing to do with MEV end up bearing higher fees, which deteriorates the overall user experience of the network.
This issue can be somewhat mitigated by introducing a local fee market, like Solana. A local fee market adjusts fees not for the entire block but for specific accounts or contracts. However, even in such a structure, it cannot completely prevent the phenomenon of transaction costs for contracts where spam transactions are concentrated from becoming abnormally high.
2. Chain Operator Perspective - Decreased Revenue
The fact that arbitrageurs choose spam strategies despite the implementation of MEV auctions like priority fees or Timeboost indicates that the spam strategy is a cheaper route to acquire MEV. Conversely, this means that 'MEV auctions are not effectively capturing MEV.'
If MEV auctions are properly designed such that participating in the auction becomes a better strategy for arbitrageurs than spam, chains could generate more revenue.
Even though there is an MEV auction mechanism on each chain, why do arbitrageurs choose spam strategies? Let me explain using the example of Timeboost.
Timeboost has implemented an auction that sells arbitrage opportunities for the next minute. The winner of this auction will gain the right to access the Express Lane for one minute.
This Express Lane allows the user to place trades 200ms earlier than regular users. In summary, it is selling the right to see the user's block and place transactions 200ms faster than others every minute.
However, I think there are a few issues here.
1. The Timeboost auction sells 'future arbitrage opportunities', which hinders participation incentives due to uncertainty.
Small arbitrageurs are likely to feel that burning money in an auction is risky since they do not know what transactions will come in the next minute, and it is likely that only market makers and specialized search firms that have been doing large-scale arbitrage will take these slots. In other words, participants in the Timeboost auction are bound to be centralized.
In fact, almost all slots in Timeboost are almost monopolized by two companies, Selini Capital and Wintermute.
3. Additionally, the paper revealed that Selini Capital and Wintermute, who won the Timeboost slot, also chose spam as one of their main strategies. The biggest reason is that a 200ms time advantage is not sufficient to find MEV opportunities and send transactions. The fact that they still engage in spam despite having a 200ms advantage suggests that 200ms is inadequate.
I think Timeboost is one of the good protocols that FCFS blockchain can choose to capture MEV, but it can be seen as a failure or a half-success in that it has not become the top strategy for MEV searchers.
To improve this, we need to design a low-latency auction structure rather than a loose auction that simply sells "future 1 minute". A faster network structure is crucial so that the winning bidder of the MEV auction can immediately backrun the trades.
It seems worth watching what kind of structure will emerge in the future!
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