12 April 2024 · Block Height 838850 · Bitcoin Price $71K

Happy Friday!

Today we’re war correspondents, reporting from ground zero: the Bitcoin Mempool.

Quick Hits

• Christie’s Auctioning Ordinal Maxi Biz

• “Big 3” - MARA / CLSK / RIOT now over 70% of mining pubco share

• Alpen Labs raises $10.6m to build zk, “Bitcoin economy”

• ASIC manufacturer Auradine raises $80 million in Series B

Chart of the Week

Watch out for the Mempool Snipers!

Bitcoin’s fees are up again this week, but it’s probably not what you think it is.

It’s not new Inscriptions. It’s not BRC-20 tokens. Or Runes.

It’s snipers!

What is it? This type of “Mempool Sniping” is when a purchase is made on an ordinals marketplace, that purchase enters the public mempool, then the original transaction is snipe via a process called “Replaced-By-Fee (RBF)”–more on that later–resulting in the purchased Ordinal going to the sniper’s wallet. Basically, people watch the mempool to see when underpriced assets are floating around in the mempool and then they “snipe” those to their own wallet.

And it’s generating a lot of fees on-chain. According to Mononaut, many blocks in the past couple days were comprised over 30% from fees attributable to this mempool sniping.

Why does sniping even happen? Most sniping incentive is when a collection floor price moves up on a marketplace and some of the originally lower priced assets are still waiting to be confirmed on-chain. So the transaction–called a Partially Signed Bitcoin Transaction (PSBT)–sitting unconfirmed in the mempool still retains the original price of the asset, but the market price for the asset is now decently higher. The snipers just pay a marginally higher fee (by RBFing the transaction) to redirect that asset at the original sale price to their own wallet. You can monitor where the market for an ordinals collection currently is and frontrun an earlier "sale" before it's confirmed on-chain.

At it's core this is a market pricing issue: if the market were perfectly efficient and the inscriptions were priced at their agreed upon market rate there would be no margin to capture from mempool snipers. However–and this is where Bitcoin's longer block time is really defining Bitcoin MEV–the longer average block times allow the secondary market pricing to move significantly from block-to-block. So perhaps that inscription was priced correctly when it was purchased, but because the confirmation isn't instant, the secondary market value can move significantly while it's in-flight. Now Bitcoin mempool searchers can snipe that and sell for a profit.

In more detail, slightly more technical: When you list something on an ordinals marketplace you sign a PSBT between you, the marketplace, and a potential buyer. That buyer could be anyone, and the PSBT isn’t revealed to the buyer until someone uses the marketplace to make that purchase. Since the buyer could be anyone, the third leg of the PSBT is signable by anyone (sighash_single). Once that PSBT is revealed out in the open mempool and not confirmed, savvy users can replace that transaction with a higher-fee one of their own, just with themselves as the “buyer”.

What do we take away from this?

1) Power-user MEV on Bitcoin is in the driver's seat today; does this increase over time?

2) This activity is particularly hot when there's significant price volatility of ordinals-type assets. Maybe it's a major drop or maybe it's someone sweeping a collection and causing a market frenzy.

Fees on Bitcoin are now affected by secondary markets.

Links we liked

Tweet: Core isn’t the right venue for policy changes - Francis Pouliot

Tweet: Bitcoin Halving Deep Dive (must-watch!)

Video: What Are Runes

Blog: BitVM liquidity crunch issues

Blockspace Podcasts

🎙️ Are Mining Pools Political Targets? 

(YouTube) Politicians are taking aim at mining pools, but pool operators aren’t making it any easier by allowing for various transaction types on-chain. All this and more in this week’s mining news roundup!

🎙️Solana: What’s Right And What’s Wrong

(YouTube) Eugene Chen, co-founder of Ellipsis Labs, discusses the future of decentralized finance, Solana’s vision for transforming traditional finance, and how Phenix aims to redefine on-chain trading. He also shares insights on the Ethereum vs. Solana debate and the challenges of optimizing blockchains for Defi applications.

🎙️What You Should Know About BitVM

(Youtube) We nabbed Post Capone to help us understand what is going on with BitVM, then we chat with Lyndoco about Pre-Runes Mania!

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