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Blockchains, and specifically smart contracts, have promised to create fair
and transparent trading ecosystems.
Unfortunately, we show that this promise has not been met. We document and
quantify the widespread and rising deployment of arbitrage bots in blockchain
systems, specifically in decentralized exchanges (or "DEXes"). Like
high-frequency traders on Wall Street, these bots exploit inefficiencies in
DEXes, paying high transaction fees and optimizing network latency to frontrun,
i.e., anticipate and exploit, ordinary users' DEX trades.
We study the breadth of DEX arbitrage bots in a subset of transactions that
yield quantifiable revenue to these bots. We also study bots' profit-making
strategies, with a focus on blockchain-specific elements. We observe bots
engage in what we call priority gas auctions (PGAs), competitively bidding up
transaction fees in order to obtain priority ordering, i.e., early block
position and execution, for their transactions. PGAs present an interesting and
complex new continuous-time, partial-information, game-theoretic model that we
formalize and study. We release an interactive web portal, http://frontrun.me/,
to provide the community with real-time data on PGAs.
We additionally show that high fees paid for priority transaction ordering
poses a systemic risk to consensus-layer security. We explain that such fees
are just one form of a general phenomenon in DEXes and beyond---what we call
miner extractable value (MEV)---that poses concrete, measurable,
consensus-layer security risks. We show empirically that MEV poses a realistic
threat to Ethereum today.
Our work highlights the large, complex risks created by transaction-ordering
dependencies in smart contracts and the ways in which traditional forms of
financial-market exploitation are adapting to and penetrating blockchain
economies.

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