Bitcoin MEV and Block Construction

Bitcoin MEV is real. The advent of Bitcoin L2s, DeFi protocols, and token standards like Ordinals and Runes created a complex transaction space ripe for extraction, moving beyond simple fee arbitrage.

Block construction is the battlefield. Unlike Ethereum's open mempool model, Bitcoin's native block template protocol is opaque, forcing MEV searchers to rely on trusted relays and private mempools like those from ViaBTC.

The MEV supply chain fragments. Specialized actors emerge: searchers find opportunities, builders craft profitable blocks, and validators (miners) select the highest-value bundle, creating a multi-layered market.

Evidence: Over $500 million in Ordinals-related MEV was extracted in 2023, demonstrating the scale unlocked by new transaction types and sophisticated tooling.

Bitcoin MEV is extraction, not reordering. On Ethereum, MEV is primarily about transaction ordering within a block. On Bitcoin, the dominant form is fee sniping, where miners replace pending transactions by re-mining previous blocks to claim their fees, a strategy enabled by Replace-By-Fee (RBF).

The block builder market is a duopoly. Over 90% of Bitcoin blocks are built by two entities: Ocean Pool and Foundry USA. This centralization creates a single point of failure for censorship and creates an opaque market, unlike Ethereum's competitive PBS ecosystem with builders like Flashbots and Titan Builder.

UTXOs constrain arbitrage complexity. Bitcoin's UTXO model and lack of a rich DeFi ecosystem limit the cross-domain arbitrage opportunities that drive most Ethereum MEV. The primary extractable value comes from time-sensitive transactions like exchange deposits and ordinal inscriptions.

Evidence: Inscriptions drove Bitcoin's MEV revenue to over $200M in 2023, with a single block earning 6.7 BTC ($435k) in fees, demonstrating how non-financial use cases now dominate the extraction landscape.

Miner Extractable Value is inevitable. Any blockchain with a mempool and variable transaction ordering creates arbitrage opportunities. On Bitcoin, this manifests as time-sensitive arbitrage between centralized exchanges and DEXs like the Lightning Network.

Naive FIFO ordering loses money. Miners who simply order transactions by fee density cede value to sophisticated block builders. These entities use algorithms to reorder swaps and liquidations for maximum profit before handing the builder a pre-constructed block.

The solution is professionalization. Protocols like Stratum V2 and services from firms like Braiins separate block building from hashing. Miners outsource construction to specialists, capturing a share of MEV instead of leaving it on the table.

Evidence: Research from Galaxy Digital shows Bitcoin MEV, while smaller than Ethereum's, generates tens of millions annually. This revenue is captured almost exclusively by a small group of advanced mining pools.

Limited Programmable State is Bitcoin's primary MEV constraint. The UTXO model and lack of a general-purpose virtual machine prevent the complex, multi-step atomic arbitrage and liquidation bundles that define Ethereum MEV. The execution environment is deterministic, leaving minimal information asymmetry for searchers to exploit.

Fee Market Simplicity reduces strategic bidding. Bitcoin's block space is a single, fungible commodity, unlike Ethereum's multi-dimensional gas market for storage and computation. This creates a winner-takes-all auction for inclusion, not a complex game for ordering and execution.

Dominant Exchange Flows are the primary MEV source. The vast majority of extractable value comes from large OTC desk transactions and exchange deposits/withdrawals visible in the mempool. This is front-running via simple replacement, not the sophisticated sandwich attacks seen on Uniswap.

Evidence: MEV-Boost relays process over 90% of Ethereum blocks. Bitcoin has no equivalent infrastructure because the economic incentive to build it is orders of magnitude smaller. Measured MEV on Bitcoin is a fraction of its fee market, unlike Ethereum where it often exceeds base fees.

PBS is inevitable on Bitcoin due to economic specialization. The proposer-builder separation model, proven on Ethereum by Flashbots, emerges when block rewards are insufficient. Bitcoin's halvings and fee volatility create this exact pressure, forcing miners to outsource complex MEV extraction to specialized builders for profit.

Builders centralize first. The specialized hardware (FPGAs) and private mempool data required for optimal Bitcoin MEV create high entry barriers. This mirrors the centralization seen in Ethereum's PBS, where a few builders like Titan and Rsync dominate block production.

The market fragments. Unlike Ethereum's unified PBS, Bitcoin will see competing builder networks. Protocols like Lava Network and Babylon will offer different data and security guarantees, creating a stratified market where builders bid for block space from miners.

Evidence: On Ethereum, post-PBS, the top three builders produce over 80% of blocks. Bitcoin's MEV, currently estimated at $500M annually, provides the economic incentive to replicate this model, accelerating centralization.