What Are Private Mempools & How Can They Combat MEV on Bitcoin?

Mempools (short for ‘memory pools’) and miner extractable value (MEV) are often mentioned side by side and for a good reason. Despite acting as a transaction waiting room for blockchains, mempools have a hidden danger lurking in their depths: bots carrying out MEV exploits.

Specifically, these bots are programmed to front-run or ‘snipe’ transactions, exploiting the brief window of time between a transaction’s submission and its finalization to copy trades from other users and execute them. This way, they efficiently sneak away with the users’ would-be profits.

In this guide, we’ll explore how you can protect yourself from these attacks through the use of private mempools.

The Bitcoin mempool refers to a space where unconfirmed transactions in the Bitcoin network reside until a miner adds them to a new block. 

In other words, the Bitcoin mempool is sort of a waiting room for pending transactions on the Bitcoin blockchain.

This is how it works: a Bitcoin node runs its own mempool and performs verification of transactions in terms of their correctness, fund sufficiency, and double-spending occurrence, according to the consensus rules. The mempool guarantees transactions are queued up and ready for processing.

After a BTC sender signs a transaction, it moves into the node mempools until a miner picks it up, confirms it, and includes it in a block. Following its inclusion in a new block, the transaction is confirmed and removed from every node’s mempool and the funds have arrived in the receiver’s bitcoin wallet.

Typically, transactions in the mempool compete based on fees, with miners prioritizing higher-fee transactions for maximized earnings.

Mempools can be private or public. A public mempool is fully transparent and broadcasts transactions to the entire network. In a private mempool, by contrast, participants submit transactions directly to only select entities, thus keeping the information hidden and reducing processing times.

Think of a private mempool as the more restricted or exclusive version of the two. 

It’s often deployed to reduce the risk of MEV exploits like front-running, sniping, or sandwiching. Simply put, by directing signed transactions through a private mempool, users benefit from improved security and efficiency.

Private mempools avoid announcing trades to the entire network before they’re completed by creating a secure channel between transaction submitters and specific miners. 

More precisely, this involves switching the endpoint from a standard RPC node (a server that interacts with a blockchain) to a private mempool endpoint.

Transactions sent to a private mempool circumvent the public mempool, so only authorized nodes within the private mempool network can see them. This makes the transaction less visible until it is confirmed in a block. 

Private mempools also prioritize and queue transactions based on predefined criteria, thus reducing the risk of reordering by miners. Following the passage through a private mempool, the transaction can then be included in a block, by being forwarded to the public mempool first or directly to miners.

Now, let’s take a look at the pros and cons of using private mempools when you’re transacting on a blockchain. 

Pros

• Transactional privacy: They don’t broadly expose any transaction details, which makes private mempools a lot more private than their public counterparts. This privacy also brings more security.
• Prevent MEV: fPrivate mempools also help prevent MEV and front-running exploits that cause financial losses. Attackers can’t front-run transactions since they can’t see them to begin with.
• More control: Private blockchain mempools provide more control over the order in which transactions are processed, so participants or malicious actors can’t reorder them to their own advantage.

Cons

• Centralization concerns: Private mempools might introduce new intermediaries at critical areas in blockchain transaction pipelines, which could be a gateway to centralization.
• Trusting third parties: Users are expected to trust individual third parties rather than the broader network to make sure their transactions are completed. This paves the way for these third parties to upcharge users or even front-run them, just like a typical MEV bot would.

Potential transaction delays: Despite increased efficiency, speed, and privacy, using private mempools can sometimes still potentially incur delays in transaction confirmation.

Maximum or maximal extractable value, miner extractable value, or MEV on Bitcoin is the highest value a miner, or a bot can extract from moving around transactions when a new block is being generated.

The term was first coined and expanded as an idea by smart contract researcher Phil Daian and his colleagues in 2019. They described it as the “total amount of ETH miners can extract from manipulation of transactions within a given time frame, which may include multiple blocks’ worth of transactions.”

At the time, they specifically referred to ETH due to the MEV strategies being most lucrative and popular on Ethereum and similar blockchains, as their smart contracts present a prime opportunity for malicious MEV extraction. 

However, users of the Bitcoin blockchain might also be targeted by these exploits as well. This is especially likely as Layer 2 systems build capabilities for more complex operations such as borrowing, lending, and trading. Thus, solutions to MEV attacks are needed on Bitcoin.

Because private mempools enhance transaction privacy, they conceal details of a transaction until it’s confirmed. This concealment prevents anyone (or anything) from manipulating transaction orders for profit. One of the most successful methods is arising out of the creative work of Sovryn.

Specifically, as a builder of the largest Bitcoin DeFi ecosystem, Sovryn has initiated BitcoinOS. It’s an entire operating system existing on Bitcoin, representing a scalable, secure, and flexible smart layer for building interoperable apps and chains on the most popular blockchain.

As a superlayer of trustless and interoperable rollups, BitcoinOS also reduces processing time, transaction fees, and potential for MEV exploitation. And that’s not all. BitcoinOS also aims to enable near-trustless use of BTC without relying on federated or economically secured pegs.

By combining rollups and private mempools, BitcoinOS can enhance privacy and reduce MEV risks on Bitcoin. 

All things considered, the implementation of private mempools is one of the best ways to enhance transaction privacy and combat MEV on Bitcoin. And together with rollups, this strategy is taken to a whole new level, representing a significant evolution in fighting exploits on Bitcoin.

Buy SOV today to have your say in Sovryn’s Bitocracy and help drive the future of Bitcoin and BitcoinOS.