Key Takeaways
- Flashbots is a private MEV marketplace that bypasses the mempool to connect MEV searchers with block builders directly.
- By allowing users to communicate and bid directly with blockbuilders, Flashbots reduces competition in the mempool, minimizes gas wars and lowers transaction fees.
- Ethereum’s “Dark Forest” denotes the mempool’s predatory nature, where MEV bots exploit public transactions through tactics like front-running and sandwich attacks.
- To combat these risks, Flashbots offers privacy tools that allow users to shield transaction data from searchers and avoid MEV exploitation.
Maximal Extractable Value (MEV) is a measure of the maximum value that can be extracted from a block of transactions via careful manipulation of how the block is structured. It was once a privilege reserved for miners, who have the final say in the block body – but a clever platform called Flashbots is changing that.
Flashbots is a MEV marketplace that democratizes MEV by connecting searcher bots with blockbuilders. It also offers new options protecting your own transactions against the MEV attacks pervading Ethereum’s dark forest. In this article, we’ll explore how Flashbots works and what it means for your Ethereum transactions.
What Is Flashbots?
First, a short explainer: MEV bots enable anyone to scan the Ethereum mempool for profitable opportunities, and optimize gas fees to ensure their transaction bundles are prioritized by validators. But this led to intense competition in the mempool, where the bidding war between MEV bots pushed up gas fees for everyone and congested the network. Flashbots began as a mission to address that problem.
The platform was launched in 2020 by a team of Ethereum researchers and developers who saw the need for a structured, more efficient way to handle MEV without congesting the network. Flashbots is a private “MEV marketplace” where MEV searchers can bypass the mempool altogether. It puts searchers (MEV bots), block builders, and validators in direct contact to arrange MEV opportunities before transactions hit the mempool.
By providing a way to negotiate transaction bundles off-chain, Flashbots prevents the chaotic gas wars that previously plagued the Ethereum network when traders fought for priority block space. It also enables anyone to influence the composition of the final block, via an auction.
Beyond restructuring the process of Flashbots has also developed a solution that offers users MEV protection (more on that later).
How Does Flashbots Work?
Flashbots connects different participants in the MEV ecosystem through a structured MEV auction system.
Validators (block builders) connect to the marketplace via Flashbots MEV-Boost, an open-source middleware that gives them access to the platform. According to the MEV-Boost documentation, this can increase validator staking rewards by up to 60%. This makes the feature lucrative for any validators on Ethereum.
Once connected, here’s how the auction works:
- A searcher (MEV bot) identifies a profitable opportunity in the Ethereum mempool, such as an arbitrage trade between two decentralized exchanges.
- Instead of submitting their transaction to the public mempool, the searcher sends a private bid to a block builder via the Flashbots Relay. The bid contains a smart contract payment to the validator that pays out if the transaction goes through.
- Block builders aggregate bids from multiple searchers, constructing the most profitable block possible.
- The builder then submits this block to an Ethereum block proposer, who finalizes and includes it on-chain.
The searcher profits from the MEV opportunity, offering a portion of their profits to the builder in exchange for prioritization. Meanwhile, this bidding system also benefits block builders by increasing their overall rewards. Finally, validators (block proposers) maximize their staking rewards by selling block space to the highest bidder in an open market.
This structured MEV auction reduces gas fees, since it bypasses the public mempool and allows transactions to be directly proposed to block builders. This improves transaction efficiency, while keeping validators incentivized to participate.
How Do Flashbots Reduce Gas Wars?
Ethereum’s main problem over the years has been scalability. As more and more users started using the platform, this led to network congestion and the so-called “gas wars”. Anyone trading on Ethereum had to bid high fees to ensure that their transactions had priority.
Gas wars are still a major problem on the network and while Ethereum 2.0 promises to solve this, solutions like Flashbots are already doing their part.
With Flashbots, MEV searchers can submit private bids directly to builders instead of competing publicly in the mempool. This reduces transaction fees, eliminates redundant transactions, and ensures only the most valuable transactions make it into a block. As a result, Ethereum becomes more efficient while traders avoid unnecessary costs.
What Is Ethereum’s Dark Forest?
The term “Dark Forest” in Ethereum refers to the often predatory nature of the blockchain’s public mempool It likens MEV bots and searchers who continuously monitor transactions to silent hunters waiting for prey. This concept draws inspiration from Cixin Liu’s science fiction novel “The Dark Forest”, where revealing your presence in a dangerous universe almost guarantees destruction.
Similarly, your transaction appearing in Ethereum’s mempool carries risk. Once detected, it becomes a potential target for tactics such as front-running or sandwich attacks, both of which rob you of profit.
Even something as simple as a token swap on a decentralized exchange can become an opportunity for MEV bots to manipulate pricing, causing unsuspecting traders to lose money. For example, a trader lost over $200,000 while simply trying to swap one stablecoin for another.
How Can Flashbots Protect Traders From MEV Bots?
So how can you protect yourself from this dark forest? Beyond facilitating MEV auctions, Flashbots offers different features that help traders protect their transactions from getting MEVed.
MEV-Share
Flashbots has also developed MEV-Share, a privacy-enhancing tool that allows users to control what parts of their transactions are visible to searchers. Instead of exposing full transaction data, MEV-Share reveals only limited information that is enough to allow profitable execution, but not sufficient to enable front-running or manipulation.
It achieves this by sending transactions to a private MEV-Share Node which only shares information based on a user’s privacy preferences. Searchers can still bid on this data but it’s the user who selects the distribution of the bid. As a result, users can get MEV refunds.
Flashbots Protect
Flashbots Protect is a user-facing tool that lets traders send private transactions directly to block builders. You can think of it as a secure tunnel for submitting transactions privately.
It keeps transactions out of the public mempool and sends them to a private pool within Flashbots, shielding them from front-running and sandwich attacks. DeFi users who want to avoid sandwich attacks, such as the recent one on Uniswap, can utilize this tool or simply add it to a wallet such as MetaMask.
Closing Thoughts
The key feature of Flashbots is that it offers a bypass of the Ethereum mempool, and a direct line of communication with block builders. This removes validators’ monopoly of MEV, and also offers a system by which traders can protect themselves against front-running.
Flashbots is reshaping how MEV is extracted and managed on Ethereum, transitioning from chaotic, inefficient gas wars to a structured MEV marketplace.
While Ethereum’s dark forest remains a challenge for traders, there’s hope at the end of the tunnel. Flashbots provide tools to shield transactions from exploitation, helping users navigate the network more securely.
