[Paper Review] Quantifying Blockchain Extractable Value: How dark is the forest?

Kaihua Qin, Liyi Zhou+1 more|arXiv (Cornell University)|Jan 14, 2021

Blockchain Technology Applications and Security33 citations

TL;DR

The paper quantifies blockchain extractable value (BEV) on Ethereum over 32 months, focusing on sandwich attacks, liquidations, arbitrage, and a generalized transaction replay method, and analyzes BEV relay systems.

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.

Motivation & Objective

• Quantify real-world BEV harvested from known trading activities (sandwich attacks, liquidations, arbitrage) on Ethereum over 32 months.
• Estimate profits from a generalized transaction replay attack and assess its impact on BEV.
• Formalize and analyze BEV relay concepts and their effect on blockchain security.
• Evaluate how BEV activities relate to blockchain security risks and miner incentives.

Proposed method

• Collect and analyze on-chain data from Uniswap V1/V2/V3, Sushiswap, Curve, Swerve, 1inch, Bancor for sandwich attacks and arbitrage; Aave, Compound, dYdX for liquidations.
• Define heuristics to identify sandwich attacks, liquidations, and arbitrage events in block and mempool states.
• Compute profits by converting detected BEV transactions to USD at execution time or via platform prices.
• Develop and empirically evaluate a generalized transaction replay algorithm that copies victim transactions to extract revenue.
• Formalize BEV relayer concepts as BEV transaction forwarding or relaying between traders and miners.
• Assess distributions of gas prices and strategies (front-running, back-running, private relays).

Experimental results

Research questions

• RQ1 What is the total BEV profit extracted from sandwich attacks, liquidations, and arbitrage on Ethereum over the observed period?
• RQ2 How much BEV could be extended by a generalized transaction replay attack?
• RQ3 What is the role and impact of BEV relayers on blockchain security and network overhead?
• RQ4 What are the dominant behavioral patterns (front-running vs back-running) and transaction-fee dynamics in BEV?
• RQ5 How prevalent are privately relayed BEV transactions and what profit do they yield?

Key findings

• BEV from sandwich attacks, liquidations, and arbitrage totaled $540.54M USD over 32 months across 11,289 addresses and 49,691 cryptocurrencies over 60,830 on-chain markets.
• The highest BEV instance observed amounts to $4.1M USD, about 616.6x the Ethereum block reward.
• A novel transaction replay algorithm could have yielded $35.37M USD, extending BEV by $35.18M USD while intersecting a small fraction of events.
• Private relays (zero gas price) were used in 31.98% of sandwich attacks, yielding $81.04M USD, showing BEV relays significantly contribute to profits.
• Liquidations (fixed spread) produced $89.18M USD from 31,057 events over 28 months, with front-running accounting for 74.50% of liquidations.
• Arbitrage trades totaled $277.02M USD across 1,151,448 trades, with 9.6% privately relayed, yielding $82.75M USD.
• Arbitrage patterns are often two- or three-market (two-point/triangular) with most involving ETH, USDC, USDT, and DAI (99.91%).
• A BEV relayer can increase the number of blockchain forks and chain reorganizations, potentially worsening consensus-layer security.