Author: JUGGERNAUT
Compiled by: TechFlow
Last year, I published two short articles exploring the origins of the Banana Gun Bot team.
The articles analyze the on-chain movement of funds used to create the Banana Gun Bot and raise some troubling questions about the developer’s background. When the background of an anonymous developer of a leading trading bot appears suspicious, the question that follows is, for whose benefit is the Banana Gun Bot operating?
10 months is a long time in the micro-cap space. In fact, it’s a long time in the decentralized finance (DeFi) space as a whole. I sat down to reflect on how right (or wrong) I was about the Banana team. The problems I found go much deeper than I initially thought — and raise serious questions about how Ethereum will operate in the future.
To set the context, let’s first look at some data.
Since May 2023, TG Bot has been widely accepted in the DeFi ecosystem and has become a stable business model, making a significant contribution to daily on-chain transaction volume. In the past year, TG Bot's transaction volume accounted for 20% - 30% of the total Ethereum transaction volume, calculated as a percentage of the number of transactions. As of June 2024, the transaction volume of all TG Bots accounted for 9.4% of Ethereum's transaction volume and came from nearly 5.3% of Ethereum wallets. Therefore, TG Bots like Banana have now become important transaction initiators on Ethereum and play an important role in the Ethereum ecosystem.
At least $5.25 billion in capital has flowed through the Banana Gun router since June 2023. While a portion of that is on Solana, this places Banana second in the category only to Maestro (the first entrant in the space, more than a year ahead of its competitors) and Bonk Bot (viewed by some as a bet on the entire SOL shitcoin ecosystem).
Observers were puzzled by the speed at which Banana captured market share. The main reason for establishing this overwhelming dominance was the success rate of the Banana Gun Bot’s sniping bundles. In its early days, Banana became the bot of choice for users who wanted to snipe rather than just trade. And in shitcoins where transaction lifecycles are often only a few hours, being first in at “block 0” is often the only thing that matters.
In simple terms, a token's block 0 is the block that "opened trading" for that token at launch, and sniping a token at launch means that your buy trade needs to be executed immediately after the token developer's "open trading" trade. To do this, Banana Gun has been suppressing all competitors by "bundling" user bribes since its launch in late May 2023. These bundled transactions are more profitable for Ethereum developers because they enhance and aggregate the tips paid to developers.
This strategy of Banana Gun was so effective that between June and October 2023, Banana Gun users’ “Block 0” dominance increased from 7% to winning 88% of first-bundle packs in the TG Bot space compared to the industry-leading TG Bot “Maestro” (operating since mid-2022).
Source: The Scientific Crypto Investor and Duncan | Flood Capital
A new market reality was forming — one in which the average shitcoin investor was doomed to fail by choosing a Banana competitor. If you wanted to be first in, you had to join one of Banana’s block 0 bundles. A culture of paying high bribes developed among the Banana user community, which was initially mocked on crypto Twitter but was quickly accepted as a fait accompli.
Source: Banana Gun TG
In fact, the high bribery culture of Banana users is seen as a sign of their commercial success and is also considered an indicator of the value of $BANANA token holders. Of course, a feature of the bribery culture of Banana users is that even in bundle transactions it is a PvP (player vs. player) competition, with well-funded users entering the token first, and small bribers providing exit liquidity for leading Banana users.
By the Banana team’s own admission, the bot was initially created for a small circle of “friends” but was subsequently opened to the public due to the fact that its development team were apparently rabid decentralized communists.
Source: Banana Gun X Handle
It’s worth noting that the allegations that the Banana team front-loaded transactions by monitoring user bribes have never been cleared up. Regardless, the second aspect of Banana Gun Bot’s sniper bundle dominance is beginning to evolve into a case study for the entire Ethereum ecosystem.
Separation of proposers and builders
When Advantage Becomes Status Quo
In September 2023, the Banana Gun Bot team launched the $BANANA token, promising a 40% share of revenue generated by the bot for users. By November 2023, Banana Gun Bot had secured over 90% of all Block 0 sniping, far ahead of its competitors in adoption and revenue generation. According to sources, by December 2023, the Banana team had executed a masterstroke. In the ETH shitcoin trade, Banana cleverly turned its early lead in the TG Bot market into an economic moat over its competitors by normalizing a culture of high bribery and leveraging its Block 0 dominance to exploit a long-theoretical but unrealized systemic weakness in Ethereum by leveraging its Block 0 dominance.
Understanding this process requires a basic understanding of how Ethereum works post-merge — specifically the concept of Proposer Builder Separation. For the average person like me who doesn’t understand but wants to learn the concepts behind PBS, I have a separate note that can be found here.
Typically, in a healthy competitive proposer-based distribution (PBS) block building market, transactions initiated by TG Bot are assigned to various builders who take pending transactions from the transaction memory pool, optimize them to maximize value, build blocks and bid to proposers to ensure their own blocks are included. A real-time visualization of this transaction process during the 12-second life cycle of a block can be seen on Payload.
In the best case, in an open competitive bidding process, proposers earn the highest fees by selecting the best bid among competing builders. Thus, value is redistributed back to the Ethereum ecosystem (because proposers stake ETH and secure the Ethereum chain), while builders are also compensated in a competitive manner (because they transfer most of their transaction fees to proposers).
The problem is that the competitive nature of the block building market can be constrained by a variety of factors. Last year, the Special Mechanisms Group argued in its paper “The Concentration Effect” (Gupta et al., 2023) that over time, a small group of savvy builders will naturally dominate PBS. Interestingly, they proposed in May 2023 that this concentration trend mainly stems from opportunities at the “top of the block”, such as CEX-DEX arbitrage.
“Top of the block” refers to the first few trades executed in each block. CEX-DEX arbitrage is when professional traders take advantage of the price difference between tokens on centralized exchanges (such as Binance) and decentralized exchanges (such as Uniswap) through price arbitrage. SMG mentioned that the advantage of top of the block opportunities in PBS is mainly monopolized by builders with “rumored ties” to high-frequency trading firms (HFT), such as Manta, Rsync Builder, and Beaver Build. The SMG team also analyzed Blocknative, Builder69, and Flashbots as other high-volume but non-HFT builders compared to builders backed by these HFT firms, thus validating their hypothesis. Ironically, SMG mentioned Titan Builder’s June 2023 paper, proving that these top builders receive more order flow, leading to their dominance in PBS auctions.
Visualizing PBS Advantages for HFT Funded Builders
One key conclusion SMG draws is that “Builders who earn more from the top of the block will be more willing to pay more for private order flow, since they need to win the entire block to exercise their top-of-block advantage”. SMG therefore envisions a situation where savvy HFT firm-funded builders could form a monopoly in PBS if they gain private order flow to consolidate their lead. In doing so, they would suppress smaller builders – just as Titan Builder pondered in its June 2023 paper (young Titan’s public RPC only went live on April 17, 2023).
So, what is private order flow?
The rebellious rise of shitcoins in 2020 has created a systemic problem for Ethereum - "MEV". Over the past 3 years, transaction senders have become increasingly reluctant to send transactions to the public Ethereum pending transaction pool, and instead turned to private pending transaction pools to avoid being preempted by MEV bots. To a certain extent, private pending transaction pools provide protection for transaction senders and therefore constitute a public good. TG Bot's trades are seen as premium trades by MEV bot operators because its users are often advised to set high slippage to ensure that their trades will succeed in high-volatility tokens.
To guard against this possibility, almost 97% of TG Bot trades are routed through this private pending trade pool. But this is not the type of trade that SMG is referring to when it is concerned about HFT firms monopolizing the PBS system. The “private order flow” that SMG refers to is order flow from a single trade initiator, sent exclusively to a single builder.
First, TG Bot provides users with more than just sniping services, but also ordinary buy and sell transactions, including limit orders on the chain. However, Banana's business model is mainly rooted in its "sniping" narrative. Its high block 0 bribe culture drives its strong revenue stream. Therefore, Banana's business model is based on assuring users that they will enter the token transaction before any competitors. Usually, in order to maximize the chances of the block 0 bribe bundle being successful on the chain, such an initiator will send its users' bundles to all leading builders on Ethereum.
For example, let's say you and I, as Ethereum builders, receive the same 10 ETH bundle from TG Bot, which includes a 5 ETH "tip" to incentivize that bundle to be prioritized in a block over all other bundles. I build a potential block, and you build one. I bid 1 ETH, you see and bid 1.1 ETH, and so on, until the entire 5 ETH is exhausted. In this case, the 5 ETH will eventually be sent to the proposer, rather than being pocketed by a builder.
NOTE: This example assumes no other TX is sent to the builder
Logically, when the TG bot sends its bundle to multiple builders, it is able to maximize the chances of the bundle being included in the winning block and on-chain, as builders compete with each other to ensure their blocks are accepted by validators. On the other hand, sending exclusive order flow (EOF) to a single builder means that the builder must successfully get the order flow (and bribe) on-chain. Any delay will weaken this advantage - the bundle will no longer be a sniper. Therefore, initiators like Banana should ideally provide order flow to at least the builder with the highest inclusion rate on-chain. From SMG's research at the launch of Banana, it was clear that builders like BeaverBuild, as well as other builders backed by well-funded high-frequency trading firms (HFT), would be ideal EOF recipients for Banana. But as we will see next, the Banana team chose a different approach.
PBS market as of June 2023. Source: SMG
An indirect effect of offering Banana order flow exclusively to a certain builder could be the following.
When a high bribe bundle is sent exclusively to a single builder, other builders cannot access that bundle and therefore cannot obtain its bribe. A reasonable strategy for the "selected" builder is to gradually increase the bid to ensure that only the minimum amount has to be paid to the proposer to get the bundle included in the next block. So if a block 0 bundle with a 5 ETH bribe is routed through EOF, and the highest block bid from a competing builder at this time is 1 ETH, then the exclusive builder can bid "just enough" to secure the block (e.g., 1.1 ETH) and keep the remaining 3.9 ETH as pure profit.
What does the Banana team gain from providing EOF to a single builder? The answer lies in potential kickbacks on the profits brought in by that builder. This EOF protocol means that the builder can return part of the bribe to Banana (as payment for EOF), so now Banana not only profits from trading fees, but also from the high bribery culture generated among its users. This is not a novel business model - Robinhood Markets in the US was paid hundreds of millions of dollars by Citadel for "order flow payment".
Source: Ethereum block 19238546
Q: Has the Banana team disclosed the existence of such an EOF protocol?
Answer: No.
Q: As the issuer of $BANANA tokens and custodian of the project treasury, does the Banana team redistribute overpaid bribes to its users or $BANANA token holders?
A: Absolutely not.
Q: But more importantly, in 2023, has the Banana team executed an EOF protocol with the Ethereum builder with the highest market share in block construction to ensure that users have the best chance of getting their bribed block 0 bundled on-chain in good trust?
A: Strangely enough, no.
Behind-the-scenes deals in the dark forest
Analysis of Banana Gun router transactions shows that the Banana team routes its sniper bundles exclusively through Titan Builder most of the time.
Titan’s market share of PBS block builds in April 2023 was only 1%. When the Banana team began directing Exclusive Order Flow (EOF) to Titan, Titan’s performance in the PBS market lagged far behind other builders. Notably, in the 7 days prior to the publication of this article, Titan had contributed nearly 40% of all Ethereum blocks.
In short, in less than a year, Titan has become:
The second largest builder of Ethereum, and
The most profitable builder in the Ethereum PBS ecosystem, thanks in large part to the Banana Gun team’s EOF support.
Source: libMEV
A closer look at the data in the graphic above from libMEV reveals the true scale of Titan’s success.
Beaverbuild is the leading block builder for Ethereum after PBS. Since the merger, it has built over 1.2 million blocks, earning Ethereum validators 146,241 ETH and generating 14,520 ETH in profit for Beaverbuild.
Take Flashbots builders for example — they delivered over 552,800 blocks, earned 16.7 ETH in profit, while transferring 58,349 ETH to the Ethereum ecosystem through their validator fees. On the other hand, Titan has delivered 615,200 blocks since May 2023, earned 13,151 ETH in profit, while transferring 60,912 ETH to the Ethereum ecosystem.
By doing this, Titan has earned nearly 787 times as much profit as Flashbots builders, while delivering slightly more blocks than Flashbots. Similarly, while Beaverbuild keeps about 9% of the ETH paid by users for building blocks, Titan has earned 17.75% of the ETH as profit for itself, while building less than half the number of blocks as Beaverbuild!
Markovich’s excellent recent paper (May 2024) explores this arrangement in depth. She uses block 19728051 (referred to as block 8930981 in the paper) as an example, which had a total value of 76.38 ETH, a total priority fee of 4.54 ETH, and a total bribe paid to Titan of 72 ETH.
Source: “Decentralized Monopoly Power in DeFi”, Sarit Markovich
Sarit pointed out that in block 19728051, the proposer Lido could only earn 19.75 ETH from the block, while Titan made a pure profit of 56.6 ETH through the EOF agreement with the Banana Gun team.
Sarit analyzed 181,651 blocks between April 6 and May 5, 2024. She looked at both Banana and Maestro, but the latter team is not relevant for this article because it has no tokens and does not promise any benefits or profits to token holders for staying invested in its ecosystem. Sarit reports that in her dataset, the total block value was 21,406 ETH, of which only 17,127 ETH was transferred to the Ethereum ecosystem through its proposers. Therefore, the proposers lost 4,279 ETH in this short period of time. Specifically, Lido did not receive a payout of 1,666 ETH in a single month of this dataset.
This paper supports my initial calculations when reviewing over 3500 blocks on the Ethereum chain between December 2023 and March 2024, where the Banana Block 0 bundle was almost exclusively routed through Titan Builder. This shows that of the total 4466.89 ETH paid by Banana users to get their sniped transactions on-chain, only 2915.65 ETH was transferred to Ethereum proposers, while 2271.26 ETH was exclusively taken by Titan Builder. Even assuming a 50-50 split of private EOFs between Banana and Titan, it can be inferred that 1135.63 ETH was sent back to the private accounts of the Banana Gun team during this period. These would be undeclared profits in the millions of dollars from innocent users who were led into a high bribery culture by the Banana Gun team.
Source: libMEV
in conclusion
An undisclosed team with a suspicious background.
Allegedly monitoring user transactions to front-run transactions (using them as their own exit liquidity),
Now extracting millions from an apparently exclusive order flow arrangement, instead of paying it to Ethereum validators, or distributing it to $BANANA holders,
This creates a worrisome centralization effect, putting pressure on the entire PBS system that Ethereum operates on.
What’s more, the listing of the $BANANA token on Binance gives their brand a huge amount of legitimacy in the public eye.
So the monkey tricks continue.
