Quantifying Blockchain Extractable Value: How dark is the forest? (2101.05511v5)

Abstract: Permissionless blockchains such as Bitcoin have excelled at financial services. Yet, opportunistic traders extract monetary value from the mesh of decentralized finance (DeFi) smart contracts through so-called blockchain extractable value (BEV). The recent emergence of centralized BEV relayer portrays BEV as a positive additional revenue source. Because BEV was quantitatively shown to deteriorate the blockchain's consensus security, BEV relayers endanger the ledger security by incentivizing rational miners to fork the chain. For example, a rational miner with a 10% hashrate will fork Ethereum if a BEV opportunity exceeds 4x the block reward. However, related work is currently missing quantitative insights on past BEV extraction to assess the practical risks of BEV objectively. In this work, we allow to quantify the BEV danger by deriving the USD extracted from sandwich attacks, liquidations, and decentralized exchange arbitrage. We estimate that over 32 months, BEV yielded 540.54M USD in profit, divided among 11,289 addresses when capturing 49,691 cryptocurrencies and 60,830 on-chain markets. The highest BEV instance we find amounts to 4.1M USD, 616.6x the Ethereum block reward. Moreover, while the practitioner's community has discussed the existence of generalized trading bots, we are, to our knowledge, the first to provide a concrete algorithm. Our algorithm can replace unconfirmed transactions without the need to understand the victim transactions' underlying logic, which we estimate to have yielded a profit of 57,037.32 ETH (35.37M USD) over 32 months of past blockchain data. Finally, we formalize and analyze emerging BEV relay systems, where miners accept BEV transactions from a centralized relay server instead of the peer-to-peer (P2P) network. We find that such relay systems aggravate the consensus layer attacks and therefore further endanger blockchain security.

• The paper quantifies BEV by analyzing 568,776,169 Ethereum transactions and estimates extraction yields of up to $540.54M USD.
• The paper introduces a generalized transaction replay algorithm that exposes replay vulnerabilities without needing full smart contract logic.
• The paper identifies that BEV relayers centralize mining incentives, exacerbating security risks through consensus destabilization and potential forking attacks.

An Analysis of Blockchain Extractable Value and Its Implications on Blockchain Security

The paper "Quantifying Blockchain Extractable Value: How dark is the forest?" rigorously examines the dynamics of Blockchain Extractable Value (BEV) within decentralized finance ecosystems on permissionless blockchains like Ethereum. Its authors critically explore how BEV impacts ledger security by incentivizing miners to engage in strategic behaviors such as forking, which can undermine consensus security.

The authors identify BEV as value opportunistically extracted by traders from decentralized finance (DeFi) smart contracts. Key mechanisms exploit a market participant's ability to reorder transactions: sandwich attacks, liquidations, and decentralized exchange arbitrage. These methodologies allow rational actors to gain significant financial benefits by manipulating transaction execution orders, often neutralizing the original intentions of DeFi users and introducing economic inefficiencies into blockchain systems.

The paper quantifies the extent and impact of BEV over two years by analyzing $568,776,169$ transactions on Ethereum. Key findings include a potential BEV yield of $540.54$ million USD, claiming that opportunistic behaviors are both significant and prevalent. For instance, sandwich attacks resulted in profits of $1.51$ million USD, with some of these attacks being conducted using privately relayed transactions without utilizing the Ethereum P2P network—a strategy that leverages BEV relay systems to maintain transaction secrecy and reduce front-running chances by competitors.

One of the paper's salient contributions is the introduction of a generalized transaction replay algorithm, which serves as a valuable tool for understanding the extent of naive replay vulnerabilities in the Ethereum ecosystem. It highlights that transaction manipulation can occur without comprehensive knowledge of a smart contract's internal logic, allowing adversaries to simulate and preemptively execute victim transaction strategies. The authors identify that such replay attacks could result in substantial financial exposure, having hypothetically extracted $51,688.33$ ETH ($17.60$ million USD) during the period studied.

The emergence of BEV relayers, which purport to enhance miner revenues and decrease network congestion, potentially exacerbates the security risks posed by BEV. By promoting a centralized auction model for BEV extraction, they diminish P2P network inclusivity and further centralize power with the largest mining stakeholders—aggravating potential consensus layer vulnerabilities by fostering conditions conducive to time-bandit attacks and other strategic forking activities.

Ultimately, the paper suggests BEV constitutes a design vulnerability rather than a feature within blockchain systems. The authors propose considering fair ordering protocols and scrutinizing DeFi mechanisms themselves to mitigate potential security risks. With such a high percentage of blockchain reordering being steered by BEV opportunities, potentially profitable but socially harmful in terms of undermining consensus stability, these insights punctuate the urgent need for both protocol and economic redesign to safeguard the long-term health of decentralized financial systems.

In conclusion, this examination of BEV dynamics within DeFi contexts unveils both quantifiable BEV revenues and intricate interactions between rational trading behavior and blockchain security. Its findings serve as a clarion call for continued exploration into methods for reducing BEV incentives or applying safeguards at transaction and protocol levels to reinforce the fundamental security promises of blockchain technologies. Further empirical research into BEV implications, perhaps augmented by simulations or engagements with fair ordering propositions, is crucial for the responsible evolution of blockchain mechanisms and their broader financial ecosystems.