One of the occurrences seen in the crypto space in Q1 2023 is the increase of the MEV by 97.5%. According to Coingecko, MEV in Q4 2022 was at $22 billion, and by the end of March 2023, that number had grown to $43.9 billion.
Maximal Extractable Value (MEV) is a term used in decentralized finance (DeFi) to refer to the maximum potential profit that a miner or validator can extract from a block by reordering, censoring, or inserting transactions. It is often associated with arbitrage opportunities and can be particularly lucrative during times of high network congestion or volatility.
However, the practice of MEV extraction has been criticized for potentially destabilizing the DeFi ecosystem and leading to unfair advantages for those with the resources and technical expertise to take advantage of it. Several projects and research initiatives are exploring ways to mitigate the impact of MEV, such as flash bots and MEV-optimizing protocols such as ArcherDAO and Gelato.
Arbitrageurs profit at 61.7%
Amid the increase in MEV, the report read that arbitrageurs had the highest profit share at 61.7%. Arbitrage in crypto is the practice of buying and selling the same cryptocurrency or asset across multiple exchanges or platforms to take advantage of price differences and make a profit.
It can be done manually or through automated trading bots, but it can be relatively rare and the profit margins can be small. Traders should conduct their research and analysis before engaging in crypto arbitrage. Arbitrageurs are investors who seek to benefit from market inefficiencies.
For example, if Bitcoin is trading at $50,000 on one exchange and $51,000 on another exchange, a trader could buy Bitcoin on the first exchange and immediately sell it on the second exchange, making a profit of $1,000 per bitcoin.
Coingecko added that the reason behind the large profit margin for arbitrageurs was the de-pegging of USDC in March, which generated $8.3 billion in volume.
Sandwich and liquidation profit
Sandwich and liquidation profits are another two ways traders gained from MEV between Q4 2022 and Q1 2023. From the report, liquidation profit yielded the highest gains at $13 million in Q4 2022, followed by Sandwich at $5 million, but was displaced by arbitrage profits at $16 million and Sandwich at $10 million in Q1 2023.
Sandwich profit is a form of front-running tactic in which two transactions are placed around a target transaction, with price changes caused by the target transaction. Liquidation profit refers to the potential profit that a miner can get by manipulating or reordering transactions that result in the liquidation of a leveraged position on decentralized finance (DeFi) platforms.