How Bitcoin MEV works: If you were to ask the majority of active crypto traders to explain “MEV,” they would probably say something along the lines of “the money that miners make by cheating at DeFi” or use the term “Miner Extracted Value.” “Maximal Extractable Value”—the profit gained from block generation through reordering, filtering, or adding transactions—is what a more experienced user would call it if asked.
Lastly, for the most part, when you ask them if MEV happens on Bitcoin, they will likely respond that it essentially occurs on Ethereum or Solana. MEV is indeed a Bitcoin token. Initially, MEV was integrated into the Bitcoin network.
MEV on Bitcoin: Full RBF
Modern mem pool operators choose transactions for blocks based on transaction fee bids. How Bitcoin MEV works: It wasn’t always like this. The first miners of Bitcoin had a selfless policy called First Seen that they implemented when building blocks. They thought it would be worth it to give businesses who accepted Bitcoin a better experience in exchange for a small cut of their profits.
At a time, “Bitcoin Jesus,” Roger Ver, tried to convert store owners to using Bitcoin at the register by promoting Bitcoin point-of-sale terminals and applications. The miners’ promise to put their accepted order transactions in the block will make receiving on-chain payments more accessible.
‘First Seen’
With the First Seen mining policy, businesses could watch a public mempool, verify that a customer had broadcast a valid transaction, and then provide the service or good right away, knowing that miners would include the customer’s transaction in the next block, regardless of how long it took to mine each one.
The First Seen policy was ridiculously selfless, even though it benefited merchants. Unsavory miners quickly began approving Replace By Fee (RBF) transactions, which allowed them to replace a lower-bidding First Seen transaction with a higher-bidding “later seen” transaction. For Bitcoin, this was the initial use of MEV. The operators of mining pools started looking for RBF so they could maximize their profits.
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.
The practice’s basic economics almost immediately swayed much of the Bitcoin network. While First Seen went away, full RBF became standard. Entirely. How Bitcoin MEV works: Now that RBF flags are the default, bitcoin mining pools will accept transactions with more significant fees, regardless of how early genuine, conflicting transactions come. The first Bitcoin miners were called total RBF Miner Extracted Value. These days, it’s seen as the norm.
MEV Bitcoin: Non-standard, outer-band transactions
Bitcoin miners can also earn MEV by changing their full node’s defaults to support non-standard transaction types when building blocks. Block 774,628 is an unusual Luxor mining pool block with one transaction—a 3.94MB picture.
The ad for the NFT collection featured a graphic that was a spin on the ‘Magical Internet Money’ joke that circulated on the r/Bitcoin subreddit. Since Luxor’s block contained the biggest Bitcoin transaction ever regarding file size, the community affectionately referred to it as “The Big Wizard.”
This particular block had two unusual features. Luxor manually overrode its node defaults to enable a single transaction to surpass Bitcoin Core’s then-customary size limit. The transaction packed a ton of picture data into a single transaction by deftly combining Bitcoin’s Taproot and SegWit enhancements. The miner had to manually create a block to account for the transaction’s non-standardity even though it was legitimate by consensus standards.
Furthermore, The Big Wizard merely made a few hundred dollars (0.009 BTC) payment. This person paid Luxor outside of the transaction (in cash, through another transaction, or otherwise) instead of the standard, on-chain procedure. Because of an out-of-band payment, MEV censors additional transactions to include a reduced fee-bidding transaction. Once more, MEV is the extra revenue generated by generating blocks by overriding node software defaults. In this instance, Luxor obtained MEV through out-of-band payments and manually overriding file size defaults.
MEV on Bitcoin: Stacks reward
The strange auction on the third-party blockchain Stacks allows Bitcoin miners to get MEV. The pertinent information is straightforward. Users that contribute Bitcoin to Stacks’ auction wallets receive rewards in Stacks’ native token, STX, generated by the company’s blockchain.
Miners started extracting value as soon as they learned this straightforward procedure. The strategy was straightforward: block other people’s Bitcoin donations, make a small contribution, win the auction, and sell the STX prize to make money. A classic example of MEV on Bitcoin is censoring other people’s Bitcoin transactions to prioritize miners’ transactions and profit from an on-chain auction.
MEV on Bitcoin: Stealing free Mints
One of the newest types of Bitcoin transactions—ordinals—is where the fourth form of MEV may be found. Users of Bitcoin can manufacture and exchange non-fungible token collections like Bitcoin Frogs or fungible tokens like ORDI by using the Ordinals software.
Free mints are a common promotional strategy for fungible and non-fungible collection creators to allow users to create Ordinals without paying money or royalties. They earn immediately if a secondary marketplace lists the collection for more than their round-trip transaction cost. How Bitcoin MEV works: Minting pool owners can censor and replace minting transactions since they control their mem pools and can look for them in real time.
Granted, not all free mints are entirely susceptible to MEV since some ordinary creators establish regulations restricting the number of free mints available at particular times or wallets. However, many free mints provide miners MEV prospects; they include well-known and enduring Ordinals collections with prompt listings on secondary markets. Comparably, numerous decentralized exchanges list fungible Ordinals. Another apparent vulnerability to MEV is when a Bitcoin user submits an order that a miner can front-run, back-run, or sandwich.
MEV on Bitcoin is Concerningly Centralizing
MEV is a worrying force since it is a solid centralizing factor in addition to robbing everyday users of their money. In actuality, MEV is a very advanced collection of financial trading strategies. Countering MEV requires more complex software, infrastructure, and R&D.
A cryptocurrency expert, Eric Wall, summarizes the four MEV types that give Bitcoin miners extra cash. Since MEV incentivizes Wall Street-style activity, high finance, and quantitative traders, it gradually siphons power and funds from regular users and concentrates them into the largest mining pools.
Put otherwise, the existence of MEV on Bitcoin is detrimental to decentralization. Indeed, compared to Bitcoin, the MEV on Ethereum and Solana has a far higher cash worth. However, MEV and centralization will rise when layer 2s, sidechains, DEXs, and other Ethereum-like initiatives integrate with Bitcoin.
