Author: EigenPhi
Compiled by: Felix, PANews
EigenPhi has conducted extensive research on the impact of MEV on major Ethereum-based DEXs such as Uniswap and Curve. Ethereum's ecosystem introduced block builders, creating an environment where MEV becomes an important source of incentives. In addition, the MEV-boost relay infrastructure on Ethereum makes MEV more accessible and fair. However, the MEV revolution has not yet arrived on the BNB chain. The network currently has 21 active validators who run on a Proof of Stake consensus (POS) model and are responsible for verifying transactions and ensuring the overall security of the chain.
Due to the monitoring of the capture of MEV by validators on the BNB chain, concerns about unfairness and centralization and community complaints have arisen. Fortunately, recent discussions on BNB Chain show that they are actively working to build a more balanced and inclusive DeFi ecosystem, introducing MEV services to the network, which can both protect users and bring more income to validators.
Since BNB Chain has lower operating costs than Ethereum, the launch of PancakeSwap V3 with the same centralized liquidity functionality will create more user opportunities.
Arbitrage income between BNB Chain and Ethereum
After an in-depth investigation into arbitrage transactions between July 1, 2022 and March 26, 2023, it was found that arbitrageurs extracted more than $40 million from the BNB Chain in nine months.
We also investigated arbitrage trading on Ethereum during the same time period. Although the total revenue on Ethereum is more than double that on BNB Chain, due to the high cost of arbitrage trading on Ethereum, the profit levels of arbitrage seekers on both chains are comparable.
The data in the pie chart below shows that BNB Chain’s profit margin is 94.5%, while Ethereum’s profit margin is 45.8%.
Cost Investigation of BNB Chain and Ethereum Arbitrage Strategies
EigenPhi investigated the cost-benefit ratio for each month during the time period. The cost-benefit ratio of PancakeSwap arbitrageurs on the BNB chain is basically consistent with the total arbitrage on the BNB chain. In addition, the cost-benefit ratio of Uniswap on Ethereum was investigated. Ethereum's high cost resulted in a cost-benefit ratio of more than 0.7. However, the cost-benefit ratio of the BNB chain is almost an order of magnitude lower than that of Ethereum. The same is true when comparing PancakeSwap and Uniswap on their respective chains.
It is cheaper to create an arbitrage bot on the BNB chain than on Ethereum. For example, an arbitrage seeker only needs $4.6 to create a bot with the highest trading profit on BSC; on Ethereum, the same bot will cost $200.
MEV Opportunities on PancakeSwap V3
PancakeSwap announced the launch of V3 on BNB Chain and Ethereum on April 3, introducing centralized liquidity features that will provide more opportunities for users, arbitrage seekers, and market makers. Proper use and management of liquidity is essential to extracting value from the market. While heavy use of liquidity can cause serious problems, effective use can benefit users. Therefore, understanding how to use and manage liquidity is essential to maximizing its potential.
1. PancakeSwap V3 Arbitrage Opportunities
Once V3 is launched, the liquidity in the PancakeSwap pool may fluctuate significantly, which will create more arbitrage opportunities.
Currently, a considerable amount of arbitrage trading is only done in the PancakeSwap pool. With the launch of V3, these arbitrage bots may not need to make much change in their methods to obtain more arbitrage opportunities.
It is worth noting that in Ethereum, many arbitrage bots have generated considerable profits simply by running between Uni-V2 and Uni-V3. In addition, given the similarities in AMM design between PancakeSwap on the BNB chain and Uniswap on Ethereum, arbitrageurs currently running between Uni-V2 and Uni-V3 are likely to seamlessly transition to PancakeSwap after V3 is enabled without making major changes to existing strategies.
For example, EigenPhi observed that a single arbitrage strategy between Uni-v2 and Uni-v3 in Ethereum has generated over $3 million in profits. Once V3 launches, similar opportunities will also emerge on PancakeSwap, allowing traders to take advantage of these profitable trades.
2. Opportunities that PancakeSwap V3 brings to market makers
There are many benefits to pooling liquidity, which allows liquidity providers and users to manage liquidity more efficiently, and this advantage also attracts traditional market makers.
Below is an example of how a market maker manages Uni-V3 liquidity. The bot balances liquidity on a trading pair by trading tokens and adding them back to the pool, ensuring that the current price is within an acceptable liquidity range. The bot may perform this balancing operation multiple times a day, earning up to $2,000 per day.
Market Maker’s Token Flows:
However, market makers face high costs when adjusting Uni-V3 liquidity on Ethereum, which limits the frequency of market makers’ adjustments. Due to the high cost of adjusting liquidity, it is not uncommon for market makers to lose money. However, the lower cost of adjusting liquidity on PancakeSwap V3 may create more opportunities for market makers to increase profits by adjusting their liquidity more frequently and more efficiently.
in conclusion
Once PancakeSwap V3 goes online, the liquidity in the PancakeSwap pool may fluctuate significantly, which will create more arbitrage opportunities on the BNB chain. In addition, the lower cost of adjusting liquidity on PancakeSwap V3 may create more opportunities for market makers to adjust liquidity more frequently and effectively on the BNB chain.
Related reading: Interpretation of Ethereum MEV industry chain: current situation, problems and improvement methods
