What is the scale of MEV on L2?
The MEV solutions for L2 networks may need to differ from the current mechanisms of Ethereum.Original Title: 《It's time to talk about L2 MEV》
Author: sui14
Compilation: Ladyfinger, BlockBeats
Editor’s Note: This article provides an in-depth analysis of the impact of the Dencun upgrade on Ethereum's L2 networks, revealing positive outcomes in reducing transaction costs, increasing user activity, and asset inflow post-upgrade, while also pointing out negative effects such as network congestion and high rollback rates caused by MEV activities. The article calls for the community to focus on and collaboratively develop MEV solutions that adapt to L2 characteristics to promote the healthy development of the Ethereum ecosystem.
Introduction
In this article, we aim to provide a data overview of the current state of L2. We monitored the significance of the reduction in gas fees for L2 following the Dencun upgrade in March, studied how activity on these networks has evolved, and highlighted emerging challenges driven by MEV activities. Additionally, we discuss potential barriers to developing MEV tools and solutions for L2.
The Good: Adoption of L2 After the Dencun Upgrade
Gas Costs Decreased by 10 Times
The gas fees for Ethereum L2 consist of two parts: the cost of executing transactions on L2 and the cost of submitting batched transactions to Ethereum L1. Different L2 gas fee structures and ordering rules vary based on their development stage and design choices. For example, Arbitrum operates on a first-come, first-served (FCFS) basis, processing transactions in the order they are received. In contrast, Optimism (OP Mainnet) and Base, as part of the OP Stack, use a priority gas auction (PGA) model that combines L2 base fees and priority fees. Users can choose to pay higher priority fees to be included faster and appear earlier in blocks. Understanding the fee structure is crucial for grasping the growth of the ecosystem and MEV dynamics.
Historically, the fees on Ethereum L1 constituted the majority of the total fees users had to pay when transacting on L2, accounting for over 80% of the costs, as shown by the black bars in the chart below. However, after the Dencun upgrade on March 14, L2 transitioned from using calldata to a more economical method known as "blobs 1" for submitting batches to L1. This temporary storage includes its own gas auction, consisting of blob base fees and priority fees.
Since Dencun, the fees L2 pays to L1 have significantly decreased—charts show a major change in the gas cost breakdown for OP Stack chains, with L1 costs plummeting from 90% to just 1%, while L2 costs now account for 99% of the total costs. This shift has led to an overall decrease in average total gas fees on L2 by about ten times, for instance, the average gas fee on OP Mainnet dropped from approximately $0.50 per transaction to $0.05.
Surge in Activity on L2
With the reduction in costs, there has been a noticeable increase in activity and usage on L2, as evidenced by the spike in L2 gas fees in the chart above. Notably, on March 26, Base's average gas fees exceeded pre-upgrade highs. To accommodate more transactions and reduce network congestion, Base raised its gas target starting March 26 and made several adjustments thereafter.
The chart below highlights the daily transaction volume on L2, showcasing significant growth across networks such as Arbitrum, Base, and OP Mainnet. Specifically, Base's daily transaction volume has quadrupled, now processing approximately 2 million transactions per day.
While it is difficult to determine whether this is a result of organic participation or influenced by incentive programs and Sybil activities—since the end of last year, with improved market conditions and the arrival of the memecoin season triggered by WIF on Solana, active addresses and DEX trading volumes on all major L2s have significantly increased post-EIP-4844 upgrade, particularly on Base and Arbitrum.
Asset Inflows to L2
With improved market conditions and the arrival of the memecoin season triggered by WIF on Solana, the TVL on L2 has been steadily rising since the end of last year. Notably, Base has become the fastest-growing chain, recently surpassing OP Mainnet in total TVL.
Since early March, Base has seen an inflow of approximately $1.5 billion in USDC, part of which is attributed to Coinbase transferring customer and corporate funds to Base. According to data from Artemis on 11 major bridges since January 2024, there has been an outflow of $14 billion from Ethereum to major L2s. Arbitrum leads with about $7 billion, followed by zkSync, Base, and OP Mainnet. Further data from Debridge Finance, a widely used cross-chain bridge in EVM chains and Solana, confirms that Arbitrum and Base are the top recipients of all fund outflows.
The Bad: Increasing Hidden MEV Activities as Gas Fees Decrease
As we further examine transactions, we notice that bot trading activities are raising gas fees and rollback rates on L2. We will conduct a case study using statistics from Base in the next section to explore this issue more comprehensively, highlighting the impact of cheaper gas on L2 post-Dencun upgrade.
L2 After the Dencun Upgrade: Similar to Ethereum Without Flashbots, but Lacking a Transaction Pool
Network Congestion
Challenges began to emerge on March 26, when the average daily gas fees on the Base network briefly surged, exceeding pre-Dencun upgrade levels. However, by June 3, Base raised its gas target to 7.5M gas/second, compared to 2.5M gas/second at the time of the Dencun upgrade, bringing average gas costs back down to around 5 cents.
On the Base network, the contracts consuming the most gas include Telegram trading bots like Sigma and Banana Gun, as well as digital wallets and DEXs such as Bitget and Uniswap. Additionally, many unmarked contracts are involved in activities such as token minting, meme coin trading, and atomic arbitrage. These contracts rank as the top contracts on the Base network based on gas fees paid.
By comparing the behavior of popular Telegram bots like BananaGun, it is evident that the gas fees generated by their transactions are significantly higher than those of regular transactions. After the Dencun upgrade, users of the BananaGun Telegram bot experienced gas prices on the Base network peaking at 30 Gwei. Although this rate later stabilized at around 3 Gwei, it was still 43 times higher than the gas fees required for other transactions.
Daily gas prices on Base, comparing Banana Gun transactions with other transactions
When analyzing the average gas prices paid monthly by all mainstream DEX trading bots on the Base network and comparing them with non-Telegram bot transactions (represented by black bars), it is clear that users employing trading bots incur significantly higher gas costs. Below is a comparison of monthly gas prices on the Base network, showcasing the differences between all Telegram bots and other transactions.
High Rollback Rates Surge
The rollback rate of transactions in blockchain networks is an important indicator of their health. We have noticed an increase in rollback rates on L2 networks, particularly on Base, Arbitrum, and OP Mainnet, following the Dencun upgrade. Currently, the rollback rate on the Ethereum mainnet is about 2%, while the rollback rates on Binance Smart Chain and Polygon range between 5-6%. Before the Dencun upgrade, Base's rollback rate also maintained around 2%, but it sharply rose to about 15% afterward, peaking at 30% on April 4. Meanwhile, Arbitrum and OP Mainnet also experienced periodic spikes in transaction failure rates, fluctuating between 10% and 20%.
Cross-chain transaction rollback rates
Upon deeper analysis, we found that the high rollback rates on L2 networks do not always represent the actual experience of regular users. Instead, these rollbacks are likely caused by MEV bots. By employing the following heuristic approach (Query 2), we identified a set of router contracts exhibiting bot-like behavior—they showed higher rollback rates when executing MEV extraction transactions:
Since the Dencun upgrade,
- Active Routers: These contracts processed over 1,000 transactions.
- Limited Interacting EOAs: Fewer than 10 EOAs (externally owned accounts) interacted as transaction senders.
- Sender Distribution: Less than 50% of transaction senders sent only one transaction, indicating that the user base does not exhibit a long-tail distribution. This suggests that the routers are unlikely to be used by retail users.
- Behavior Patterns: Transaction histories that cover exactly 24 hours or show multiple transactions within a block indicate non-human behavior.
- Exchange Concentration: Over 75% of successful transactions involved exchanges.
- Detected MEV Transactions: More than 10% of successful transactions utilized atomic MEV strategies, as detected by hildobby's heuristic methods.
Using these criteria, we detected 51 routers on Base, which likely represent a conservative lower bound of bot activity on Base.
We divided all transactions processed by routers on the Base network into two groups and conducted comparative analysis. The results showed a significant difference in rollback rates between bot-like routers and other transactions: bot-like contracts had an average rollback rate of 60%, which is six times that of approximately 10% observed in other transactions.
Daily rollback rates on Base, comparing bot-like contracts with other transactions
Based on the above data, we can infer that automated trading activities, such as those by MEV bots and Telegram bots, are likely one of the main reasons for the high gas fees and high rollback rates on the Base network.
The single sequencer architecture of L2, combined with the lack of a public transaction pool, fosters a large number of MEV strategies that exploit the sequencer, which have become a primary cause of network congestion. This congestion is particularly pronounced in L2 networks that adopt the priority gas auction (PGA) mechanism, such as OP Mainnet and Base. The result is not only network congestion but also a significant waste of block space and gas fees due to rollback transactions and MEV seeker activities. This situation resembles that of Ethereum before the emergence of Flashbots, with the difference being that the current lack of transaction pools on L2 eliminates the phenomenon of sandwich MEV.
How Big is the MEV Scale on L2?
Understanding MEV activities on L2 networks is crucial for assessing their impact. However, there is currently no widely recognized figure that has been validated through multiple sources and reliable methods for L2 MEV data. Additionally, compared to the Ethereum mainnet, L2 lacks real-time monitoring data provided by tools like mev-inspect, libmev, and eigenphi, which are essential for measuring the total amount of MEV and miners' profits.
Some of the L2 MEV datasets and studies released to date include:
- An open-source dataset built by hildobby on Dune Analytics (heuristic links: sandwich | sandwich | atomic arbitrage)
- A research paper titled "Quantifying MEV On Layer 2 Networks" by Arthur Bagourd and Luca Georges Francois, which quantifies MEV on Polygon, OP Mainnet, and Arbitrum using mev-inspect. This research was funded by Flashbots.
- The research paper "Rolling in the Shadows: Analyzing the Extraction of MEV Across Layer-2 Rollups," authored by Christof Ferreira Torres, Albin Mamuti, Ben Weintraub, Cristina Nita-Rotaru, and Shweta Shinde, which quantifies activities and discusses new MEV strategies on L2 that exploit the sequencer role and its L2 batch confirmation delays.
In addition to the above resources, Sorella Labs will soon release their MEV data indexer tool Brontes, which will be an open-source repository for both Ethereum mainnet and L2. Flashbots and the Uniswap Foundation are seeking funding to expand L2 MEV classification and quantification. If you have worked in this area or are interested in collaborating, please contact the Flashbots market research team.
Although further validation is needed, the dataset published by hildobby on Dune Analytics provides a valuable preliminary reference standard.
Atomic arbitrage volume on L2 using hildobby dataset
Data Source
In the past year, the atomic arbitrage MEV transaction volume on six major L2s, including Arbitrum, OP Mainnet, Base, Zora, Scroll, and zkSync, has exceeded $36 billion, accounting for 1% to 6% of the total trading volume on all decentralized exchanges (DEXs) on each chain. Initially, these MEV transaction volumes were concentrated on Arbitrum and OP Mainnet, but they have recently gradually shifted towards Base and zkSync.
In contrast to atomic arbitrage transaction volumes, the volume of sandwich attack transactions on L2 networks is significantly lower, which starkly contrasts with Ethereum, where the volume of sandwich attacks is four times that of atomic arbitrage. This difference is primarily due to the single sequencer setup adopted by L2 networks, which lacks transaction pools, limiting the ability of seekers to execute sandwich MEV by exploiting user transactions in the transaction pool, unless there is a data leak from the transaction pool or a sandwich attack initiated by the single sequencer. Therefore, on L2, atomic arbitrage, blind backrunning, statistical arbitrage, and liquidation have become more viable strategies for seekers.
Breakdown of MEV Volume on Ethereum
How much MEV revenue remains in the L2 market?
While it is challenging to quantify the MEV market precisely, we can examine figures from other ecosystems with MEV solutions for size comparison:
On Ethereum L1, annual validator revenue from MEV-boost blocks is approximately $96.8 million (based on an estimated price of $3,500/ETH); the median value of MEV-boost blocks is four times that of regular validator blocks.
Distribution of block rewards for regular blocks vs. MEV-boost blocks
On Solana, additional MEV revenue collected by validators through Jito's bundling service from validator tips, based on 50,000 SOL weekly, is estimated to be around $338 million (based on an estimated price of $130/SOL).
Daily tips earned through Jito bundling service, by validator with Jito Labs
Although the exact total MEV on the Base network has not been disclosed, we can estimate the market size by observing the revenue of the Banana Gun Telegram Bot, one of the most active participants in the market. Banana Gun's transaction volume on the Base L2 network is roughly equivalent to that on Solana, with each chain generating over $1 million in daily trading volume, resulting in over $10,000 in transaction fees per chain each day.
Banana Gun Telegram Bot, cross-chain volume and fees
It is important to note that the market share of the Banana Gun Bot on Solana may differ significantly from that on Base. For example, there are several other major Telegram bots on the Solana platform, such as Sol Trading Bot and BonkBot, while the number of Telegram bots that may be supported on Base could be fewer. Therefore, it is not straightforward to directly use the transaction volume and MEV revenue ratio of Banana Gun on Solana to estimate the total MEV revenue on Base.
However, through another predictive approach, we can see different results: in March, the Banana Gun Telegram Bot paid over $23 million to Ethereum block builders and validators. Notably, during the week from March 26 to April 1, Banana Gun's transaction volume on Base actually surpassed that on Ethereum, as indicated by the peak in the chart, suggesting that the Base network has significant MEV revenue potential. This comparison of cross-chain transaction volumes reveals the growth prospects of Base in terms of MEV.
Of course, there are significant differences between Base and Ethereum in terms of the MEV ecosystem. Compared to Ethereum, MEV competition on Base may be less intense, potentially leading to lower fees required for bots when bidding to validators. Nevertheless, meme coin trading bots that primarily rely on blind sniping and arbitrage mechanisms still remain viable under the sequencer architecture of Base.
MEV revenue paid by users of the Banana Gun Telegram Bot to validators
Attention to MEV Issues in L2 Networks
Ethereum has developed a mature MEV ecosystem, equipped with infrastructure tools serving participants at various levels of the supply chain. At the protocol level, MEV-boost allows validators to outsource block building tasks through bidding. For seekers, the bundling services provided by Ethereum block builders—similar to Jito Labs on Solana and FastLanes on Polygon—enable them to implement MEV strategies with rollback protection. These services ensure that block builders simulate transactions and only execute those that are guaranteed not to rollback. Additionally, private RPC services like Flashbots Protect provide ordinary users with a way to bypass public transaction pools and their potential risks. However, current L2 networks still have significant room for improvement in developing MEV infrastructure comparable to this.
Why focus on MEV strategies and solutions in L2 networks?
The MEV phenomenon persists in environments lacking transaction pools and plays a critical role in maintaining market efficiency, particularly by executing strategies like statistical arbitrage, atomic arbitrage, and liquidation to clear liquidity in outdated AMM and lending markets.
However, the absence of mature MEV infrastructure, such as bundling services, may lead to some negative consequences. In the absence of transaction pools, many MEV strategies may degrade into spam strategies, which will trigger:
- Increased network rollback rates;
- Consequently, exacerbated network congestion.
By implementing bundling services, the focus of MEV competition can be shifted from the main chain to auxiliary chains, effectively alleviating the high gas fee burden faced by users due to competition from MEV bots. At the same time, seekers can enjoy higher returns due to rollback protection, reducing the cost of failure risk.
For L2 networks adopting shared sequencers, mainstream solutions often require users to publish transactions to public transaction pools, which may lead to the re-emergence of sandwich attacks. In this case, MEV protection tools like Flashbots Protect become particularly important, as they can not only protect users from the threat of sandwich attacks but may also provide refunds for MEV or priority fees, ensuring users receive better transaction execution and more favorable prices.
The development of complex MEV infrastructure faces several unresolved challenges. First, as more value flows to sequencers, the revenue models for seekers will change over time, and marginal profits may decrease. This change may raise questions about the sustainability of highly competitive search strategies in the long term. We expect market mechanisms to regulate this phenomenon, leading common search strategies to pay a larger but not total share of value to sequencers, while less common strategies pay less.
Moreover, existing MEV infrastructure, such as the block building market on Ethereum, is rapidly evolving in terms of order flow dynamics. To date, these factors have become the main driving forces behind the centralization trend in the block building market and the rise of private transaction pools on Ethereum L1. Ensuring that the block building market remains competitive and fair is still a problem that needs to be addressed.
Finally, MEV solutions for L2 networks may need to differ from current mechanisms on Ethereum, primarily due to the unique characteristics of L2: such as shorter block generation times, cheaper block space, and relatively centralized governance structures. For example, Arbitrum's block time is only 250 milliseconds; whether such a fast block rate can be compatible with existing MEV infrastructure remains uncertain. At the same time, the ample and economical block space provided by L2 has significantly altered the landscape of transaction searching, exacerbating spam issues and necessitating new solution strategies. Furthermore, compared to other environments like Ethereum L1, L2's governance is more centralized, which may allow for additional requirements to be placed on MEV service providers, such as requiring block builders to avoid sandwich attacks on users to ensure market fairness.
