Rolling in the Shadows: Analyzing the Extraction of MEV Across Layer-2 Rollups (2405.00138v2)

Abstract: The emergence of decentralized finance has transformed asset trading on the blockchain, making traditional financial instruments more accessible while also introducing a series of exploitative economic practices known as Maximal Extractable Value (MEV). Concurrently, decentralized finance has embraced rollup-based Layer-2 solutions to facilitate asset trading at reduced transaction costs compared to Layer-1 solutions such as Ethereum. However, rollups lack a public mempool like Ethereum, making the extraction of MEV more challenging. In this paper, we investigate the prevalence and impact of MEV on Ethereum and prominent rollups such as Arbitrum, Optimism, and zkSync over a nearly three-year period. Our analysis encompasses various metrics including volume, profits, costs, competition, and response time to MEV opportunities. We discover that MEV is widespread on rollups, with trading volume comparable to Ethereum. We also find that, although MEV costs are lower on rollups, profits are also significantly lower compared to Ethereum. Additionally, we examine the prevalence of sandwich attacks on rollups. While our findings did not detect any sandwiching activity on popular rollups, we did identify the potential for cross-layer sandwich attacks facilitated by transactions that are sent across rollups and Ethereum. Consequently, we propose and evaluate the feasibility of three novel attacks that exploit cross-layer transactions, revealing that attackers could have already earned approximately 2 million USD through cross-layer sandwich attacks.

• The paper quantifies MEV extraction, showing that despite lower profits on rollups, activity frequency exceeds that on Ethereum.
• The study employs a three-year data analysis across Arbitrum, Optimism, and zkSync to reveal how reduced transaction costs fuel MEV strategies.
• It identifies potential cross-layer sandwich attacks, simulating $2M in earnings, and recommends countermeasures to enhance DeFi security.

Analysis of Maximal Extractable Value in Layer-2 Rollups

This paper presents a comprehensive analysis of Maximal Extractable Value (MEV) across Ethereum and its Layer-2 rollups: Arbitrum, Optimism, and zkSync. The paper extends over a three-year period and provides insights into the prevalence and economics of MEV following the emergence of decentralized finance (DeFi) and the subsequent adoption of rollup technologies. The paper places particular emphasis on the viability and effects of MEV strategies in environments devoid of public mempools, a critical underlying factor in traditional MEV exploitation on Ethereum.

MEV Volume and Economic Impact

The authors measure the volume of MEV activity and note that although profits in rollups are notably lower compared to Ethereum, the frequency of such operations is robust and increasing. This paradox might be partially attributable to significantly reduced transaction costs on rollups, making them attractive despite the reduced profitability per MEV instance. A key finding is that Arbitrum and Optimism are now seeing MEV activities at rates that surpass those of Ethereum.

Transaction throughput and cost reductions are key advantages of rollup-based Layer-2 solutions. While these platforms make sandwich attacks more challenging due to the absence of a public mempool, MEV in the form of arbitrage and liquidation remains feasible by examining finalized block states. Significantly, the cost analysis highlights reduced transaction fees across rollups for MEV activities, reinforcing rollups' role in democratizing DeFi accessibility.

Observed Strategies and New Attack Vectors

The paper discusses several techniques for detecting traditional MEV activities such as arbitrage and liquidation. Interestingly, no sandwich attacks were detected on the rollups within the paper period, indicating that current sequencing methods are resistant to such forms of exploitation.

A crucial contribution of this research is the identification of potential cross-layer sandwich attacks. These attacks exploit the practice of submitting Layer-2 transactions via Layer-1, presenting a novel concern. The authors describe three potential strategies for such attacks and simulate their viability using mainnet data. These simulations suggest that attackers could potentially earn approximately $2 million USD, underscoring a substantial risk vector.

Implications and Future Directions

This work has several implications for blockchain and DeFi ecosystems. The results suggest continued MEV potential on rollups despite their structural differences from Layer-1 operations. The reduction in costs and fees in rollups is contributing to their increased adoption, but this also introduces new security and economic challenges, as evidenced by the cross-layer sandwich attack strategies.

The research also highlights the advantages of private pools and encrypted mempools in mitigating parts of this issue and recommends further exploration in randomizing transaction order policies or reducing transaction delays as potential solutions. Importantly, it signals a need for consistent vigilance and adaptive strategies in the development of rollup protocols to preempt the evolving landscape of MEV and other exploits.

Conclusion

The findings enrich existing literature on MEV by not only extending insights to Layer-2 rollups but also by introducing cross-layer MEV as an area warranting immediate attention. Moving forward, there is a need for the continuous development of countermeasures against emerging MEV threats, as well as a deeper understanding of MEV's implications on blockchain financial health and fairness. This paper is pivotal for stakeholders in the DeFi space, providing a detailed evaluation of current vulnerabilities and potential future directions to secure the growing ecosystem around Layer-2 rollups.