How big is the scale of MEV on L2?

Original title: 《It's time to talk about L2 MEV》

Original author: sui14

Original translation: Ladyfinger, BlockBeats

Editor's note:

This article deeply analyzes the impact of the Dencun upgrade on the Ethereum L2 network, revealing the positive results of the upgraded L2 network in reducing transaction costs, increasing user activities and asset inflows, while pointing out the negative effects such as network congestion and high rollback rate caused by MEV activities. The article calls on the community to pay attention and jointly develop MEV solutions that adapt to the characteristics of L2 to promote the healthy development of the Ethereum ecosystem.

Introduction

In this article, we aim to provide a data overview of the current L2 status. We monitored the importance of the Dencun upgrade’s gas fee reduction for L2 in March, examined how activity on these networks has evolved, and highlighted emerging challenges driven by MEV activity. Additionally, we discussed potential barriers to developing MEV tools and solutions for L2.

The Good: L2 Adoption After Dencun Upgrade

Gas Costs Drop by 10x

Gas fees on Ethereum L2 consist of two parts: the cost of executing a transaction on L2, and the cost of submitting batches of transactions to Ethereum L1. Different L2 gas fee structures and ordering rules vary based on their stage of development and design choices. For example, Arbitrum operates on a first-come, first-served (FCFS) basis, with transactions processed 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 the L2 base fee and the priority fee. Users can choose to pay a higher priority fee in order to be included faster and appear earlier in the block. Understanding the fee structure is critical to understanding the growth of the ecosystem and the MEV dynamics.

Historically, Ethereum L1 fees have made up the majority of the total fees users need to pay when transacting on L2, accounting for over 80% of the cost, as shown by the black bars in the figure below. However, after the Dencun upgrade on March 14, L2 moved from using calldata to a more economical method, so-called "blobs 1", for submitting batches to L1. This temporary storage contains its own gas auction, composed of the blob base fee and the priority fee.

Data source

Since Dencun, L2 has paid L1 a significant reduction in fees - the chart shows a major shift in the gas cost breakdown of OP Stack chains, with L1 costs plummeting from 90% to just 1%, while L2 costs now account for 99% of the total. This shift has led to an overall drop in average total gas fees on L2 by about ten times, with the average gas fee on OP Mainnet, for example, plummeting from about $0.50 per transaction to $0.05.

Data source

A surge in activity on L2

After the cost reduction, there has been a significant increase in activity and usage on L2, as can be seen from the surge in gas fees on L2 in the figure above. It is worth noting that on March 26, Base's average gas fee exceeded the highest level before the upgrade. To accommodate more transactions and reduce network congestion, Base raised its gas target starting March 26, and has made several adjustments since then.

The chart below highlights the number of daily transactions on L2, showing significant growth for networks like Arbitrum, Base, and OP Mainnet. In particular, Base has seen a four-fold increase in daily transactions, now processing approximately 2 million transactions per day.

Data source

While it is difficult to determine whether this is the result of organic participation or the influence of incentive programs and Sybil activity - since the end of last year, with the improvement of market conditions and the arrival of memecoin season triggered by WIF on Solana, active addresses and DEX transaction volume on all major L2s have clearly increased after the EIP-4844 upgrade, especially on Base and Arbitrum.

Assets Flowing to L2

With the improvement of market conditions and the arrival of the memecoin season triggered by WIF on Solana, the TVL on L2 has continued to rise since the end of last year. Notably, Base has become the fastest growing chain, and its total TVL recently surpassed OP Mainnet.

Data source

Since the beginning of March, Base has inflows of approximately $1.5 billion in USDC, part of which is Coinbase transferring customer and corporate funds to Base. According to Artemis data on 11 major bridges since January 2024, there has been $14 billion in outflows from Ethereum to the main L2s. Arbitrum leads with about $7 billion, followed by zkSync, Base, and OP Mainnet. Further data from Debridge Finance, a cross-chain bridge widely used in EVM chains and Solana, confirms that Arbitrum and Base are the top recipients of all outflows.

Data source

The Bad: Hidden MEV Activity Rise As Gas Fees Lower

When we inspected the transactions further, we noticed that Bot transaction activity was driving up gas fees and rollback rates on L2. We will explore this more fully in the next section through a case study using Base’s statistics, highlighting the impact of cheaper gas on L2 after the Dencun upgrade.

L2 after Dencun upgrade: like Ethereum without Flashbots, but without transaction pools

Network congestion

Challenges began to emerge on March 26, when the average daily gas fee of the Base network briefly surged, surpassing the level before the Dencun upgrade. However, on June 3, Base increased its gas target to 7.5M gas/second, compared to 2.5M gas/second during the Dencun upgrade, which reduced the average gas cost back to about 5 cents.

On the Base network, the contracts that consume the most gas include Telegram exchanges BotSigma and Banana Gun, as well as digital wallets and DEXs such as Bitget and Uniswap. In addition, there are many unmarked contracts involved in activities such as token minting, meme coin trading, and atomic arbitrage. These contracts are the top contracts on the Base network ranked by gas fee payment.

By comparing the behavior of popular Telegram Bots, such as BananaGun, it is clear that the transactions they perform incur much higher gas fees than ordinary transactions. After the Dencun upgrade, gas prices spiked to a peak of 30 Gwei when users using the BananaGun Telegram bot executed transactions on the Base network. Although this rate has since stabilized at around 3 Gwei, it is still 43 times the gas fee that other transactions have to pay.

Daily gas prices on Base, Banana Gun transactions compared to other transactions

When analyzing the average monthly gas prices paid by all major DEX trading bots on the Base network and comparing them to non-Telegram bot transactions (represented by black bars), it is clear that users using trading bots incur significantly higher gas costs. Below is a comparison of monthly gas prices on the Base network, showing the difference between all Telegram bots and other transactions.

Data source

High rollback rate surges

The rollback rate of transactions in a blockchain network is an important indicator of its health. We noticed an increase in rollback rates on L2 networks such as Base, Arbitrum, and OP Mainnet after the Dencun upgrade. Currently, the rollback rate of Ethereum Mainnet is about 2%, while the rollback rates of Binance Smart Chain and Polygon are between 5-6%. Before the Dencun upgrade, Base’s reversion rate also remained at about 2%, but then rose sharply to about 15%, and peaked at 30% on April 4. At the same time, Arbitrum and OP Mainnet also saw periodic surges in transaction failure rates, which fluctuated between 10% and 20%.

Cross-chain transaction reversion rate

After further analysis, we found that high rollback rates on the L2 network do not always represent the actual experience of ordinary users. Instead, these rollbacks are likely caused by MEV bots. By adopting the following heuristics ( Query 2 ), we identified a group of router contracts that exhibit bot-like behavior - they show high rollback rates when executing MEV withdrawal transactions:

Since the Dencun upgrade,

· Active routers: The contract has processed more than 1000 transactions.

· Limited interactions EOA: Less than 10 EOA (externally owned account) wallets have interacted as transaction senders.

· Sender distribution: Less than 50% of transaction senders have only sent one transaction, indicating that the user population does not exhibit a long-tail distribution. This indicates that the routers are unlikely to be used by retail users.

· Behavioral Patterns: Transaction history covering exactly 24 hours or showing multiple transactions within a block, indicating non-human behavior.

· Exchange Concentration: More than 75% of successful transactions involve an exchange.

· Detected MEV Transactions: More than 10% of successful transactions use an atomic MEV strategy, as detected by hildobby's heuristics .

Using these criteria, we detected 51 routers on Base, which likely represents a conservative lower bound for bot activity on Base.

We divided all transactions processed by routers on the Base network into two groups and conducted a comparative analysis. The results show that bot-like routers have significantly different rollback rates compared to other transactions: bot-like contracts have an average rollback rate of 60%, which is six times the approximately 10% observed for other transactions.

Daily rollback rate on Base, by Bot-like contract compared to other transactions

Based on the above data, we can infer that automated trading activities like MEV bots and Telegram bots are likely one of the main reasons for high gas fees and high rollback rates on the Base network.

L2's single sequencer architecture, combined with the lack of a public transaction pool, has fostered a large number of MEV strategies that exploit the sequencer, which have become the main cause of network congestion. This congestion is particularly evident on 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 large amount of block space and gas fees wasted due to rolled back transactions and MEV seeker activities. This is similar to the situation on Ethereum before the emergence of Flashbots, except that there is no sandwich MEV phenomenon due to the lack of transaction pools on L2 at present.

How big is the scale of MEV on L2?

Understanding MEV activity on L2 networks is crucial to assessing its impact. However, there is no widely accepted number for L2 MEV data that is verified by multiple sources and reliable methods. In addition, compared to the Ethereum mainnet, L2 lacks the real-time monitoring data provided by tools such as mev-inspect , libmev , eigenphi , which is critical to measuring the total amount of MEV and miners' profits.

Some of the L2 MEV datasets and research published to date include:

· Open source datasets built by hildobby at Dune Analytics (inspiration links: sandwiches | sandwiches | atomic arbitrages )

· Research paper "Quantifying MEV On Layer 2 Networks" by Arthur Bagourd and Luca Georges Francois, which quantifies MEV on Polygon, OP Mainnet, and Arbitrum using the mev-inspect implementation. This research was funded by Flashbots.

· The research paper "Rolling in the Shadows: Analyzing the Extraction of MEV Across Layer-2 Rollups" by Christof Ferreira Torres, Albin Mamuti, Ben Weintraub, Cristina Nita-Rotaru, and Shweta Shinde quantifies activity and discusses novel MEV strategies on L2 that exploit sequencer roles and their 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 that can be used on Ethereum mainnet and L2. Flashbots and the Uniswap Foundation are seeking grants to expand the L2 MEV taxonomy and quantification. If you have worked on this or are interested in collaborating, please get in touch with the Flashbots Marketplace research team .

While further validation is needed, the dataset published by hildobby on Dune Analytics provides a valuable initial reference standard.

Atomic arbitrage volume on L2 using the hildobby dataset

Data source

Over the past year, atomic arbitrage MEV volume on six major L2s, including Arbitrum, OP Mainnet, Base, Zora, Scroll, and zkSync, exceeded $36 billion, accounting for 1% to 6% of all decentralized exchange (DEX) volume on each chain. This MEV volume was initially concentrated on Arbitrum and OP Mainnet, but has recently shifted to Base and zkSync.

Compared to atomic arbitrage volume, sandwich attack volume on L2 networks is significantly less, which is in stark contrast to Ethereum, where sandwich attack volume is four times that of atomic arbitrage. This difference is mainly due to the L2 network's single sequencer setting and no transaction pool, which limits the ability of searchers to use user transactions in the transaction pool to perform sandwich MEV, unless there is a transaction pool data leak or a sandwich attack initiated by a single sequencer. Therefore, on L2, atomic arbitrage, blind backtracking, statistical arbitrage, and liquidation become more viable strategies for searchers.

Data source

Ethereum MEV volume breakdown

Measuring the MEV market How much MEV revenue is left on L2?

While it’s difficult to quantify the MEV market precisely, we can examine numbers from other ecosystems with MEV solutions for size comparison:

· On Ethereum L1, annualized validator revenue from MEV-boost blocks is approximately $96.8M (estimated based on a $3,500/ETH price); the median value of a MEV-boost block is 4x the value of a normal validator block. Block rewards distribution of normal blocks and MEV-boost blocks

· On Solana, additional MEV revenue that validators collect from validator tips through Jito’s bundling service is estimated to be around $338M (based on a $130/SOL price estimate) based on a weekly staking of 50,000 SOL.

Daily Tips Earned Through Jito’s Bundling Service, by Validator with Jito Labs

While the exact total MEV volume for the Base network has not yet been announced, we can make an estimate of the market size by observing the revenue of the Banana Gun Telegram Bot, one of the most active players in the market. Banana Gun has roughly the same volume on Base’s L2 network as it does on Solana, with each chain bringing in over $1M in daily volume, which translates to over $10,000 in transaction fees per chain per day.

Banana Gun Telegram Bot, Cross-Chain Volume and Fees

Note that Banana Gun Bot’s market share on Solana may differ significantly from Base. For example, there are several other major Telegram Bots on the Solana platform, such as Sol Trading Bot and BonkBot, while Base may support fewer Telegram Bots. Therefore, Banana Gun’s transaction volume and MEV revenue ratio on Solana cannot be simply used to estimate the total MEV revenue on Base.

However, through another forecasting method, we can see different results: in March, the Banana Gun Telegram Bot paid more than $23 million to Ethereum block builders and validators. In particular, in the week of March 26-April 1, Banana Gun’s transaction volume on Base actually exceeded Ethereum, as shown by the peak in the chart, which hints at the huge MEV revenue potential of the Base network. This cross-chain transaction volume comparison reveals Base’s growth prospects in MEV.

Of course, there are significant differences between Base and Ethereum in terms of the MEV ecosystem. Compared to Ethereum, the competition for MEV on Base may be less intense, which may result in lower fees for bots to pay when bidding to validators. Nevertheless, meme coin trading bots that mainly rely on blind sniping and arbitrage mechanisms are still viable under Base's sequencer architecture.

MEV income paid by Banana Gun Telegram Bot users to validators

Focus on MEV issues in L2 networks

Ethereum has formed a mature MEV ecosystem, equipped with infrastructure tools to serve participants at all levels of the supply chain. At the protocol level, MEV-boost allows validators to outsource block construction tasks through auctions. For searchers, bundled services offered by Ethereum block builders — similar to Solana’s Jito Labs and Polygon’s FastLanes — enable them to implement MEV strategies that include rollback protection. These services ensure that block builders simulate transactions and only execute those that are determined not to be rolled back. In addition, private RPC services like Flashbots Protect provide regular users with a way to bypass public transaction pools and their potential risks. However, current L2 networks still have a lot of room for improvement in developing MEV infrastructure comparable to this.

Why should we care about MEV strategies and solutions for L2 networks?

The MEV phenomenon persists in an environment without transaction pools and plays a key role in maintaining market efficiency, especially by executing strategies such as statistical arbitrage, atomic arbitrage, and liquidation to liquidate liquidity in outdated AMMs and lending markets.

However, the lack of mature MEV infrastructure, such as bundling services, may lead to some negative consequences. In the absence of a trading pool, many MEV strategies may degenerate into spam strategies, which will lead to:

· Increased network rollback rate;

· As a result, network congestion is exacerbated.

By implementing bundled services and shifting the focus of MEV competition from the main chain to the auxiliary chain, users can effectively reduce the burden of high gas fees due to MEV robot competition. At the same time, searchers can enjoy higher returns due to rollback protection, reducing the risk cost of failure.

For L2 networks with shared sequencers, current mainstream solutions often require users to publish transactions to a public transaction pool, which may lead to the recurrence of sandwich attacks. In this case, MEV protection tools like Flashbots Protect are particularly important. They can not only protect users from the threat of sandwich attacks, but may also provide refunds of MEV or priority fees, ensuring that users get better transaction execution and more favorable prices.

The development of complex MEV infrastructure faces several unresolved challenges. First, as more value flows to sequencers, searchers’ revenue patterns will change over time, potentially reducing marginal profits. This change may raise questions about the sustainability of highly competitive search strategies in the long term. We expect market mechanisms to moderate this phenomenon, such that common search strategies will pay a larger proportion, but not all, of value to sequencers, while less common strategies will pay less.

In addition, existing MEV infrastructure, such as Ethereum’s block construction market, is experiencing rapidly evolving order flow dynamics. To date, these factors have been the primary driver of the trend toward block construction market centralization and the rise of private transaction pools on Ethereum L1. Ensuring that the block construction market remains competitive and fair remains an issue that needs to be addressed.

Finally, MEV solutions for L2 networks may need to differ from current Ethereum mechanisms, primarily due to L2-unique features such as shorter block generation times, less expensive block space, and a relatively centralized governance structure. For example, Arbitrum has a block time of only 250 milliseconds, and it is not yet known whether such a fast block rate is compatible with the existing MEV infrastructure. At the same time, the ample and economical block space provided by L2 has greatly changed the landscape of transaction searches, making the spam problem more serious and urgently requiring new solutions. In addition, compared with other environments such as Ethereum L1, L2's governance is more centralized, which may allow additional requirements for MEV service providers, such as requiring block builders to avoid sandwich attacks on users to ensure market fairness.