Arbitrage, liquidations, and backrunning

Graduate · enrolled learners

This lesson opens with MakerDAO Black Thursday, 12 to 13 March 2020.

What happened

On 12 to 13 March 2020 the price of ether fell by roughly half in a day. On MakerDAO, loans backed by ether became undercollateralized and were sent to collateral auctions, where liquidator bots called keepers bid to buy the ether and repay the debt. Liquidating is itself an MEV action: it is a backrun of the falling-price oracle update, and the keeper who acts first on the newly-liquidatable position captures the liquidation reward. But the price crash spiked network congestion and gas, and most keepers could not get their bids included, so a few auctions received winning bids of essentially zero DAI, letting a keeper take the ether collateral for almost nothing. Vault owners lost about 8.3 million dollars of collateral beyond their debts. The value of the liquidation MEV, normally competed down to a small margin, ballooned because competition itself was choked off.

The decision point

The sandwich is only one shape of MEV; the larger and more constant forms are arbitrage, liquidations, and backrunning generally, and they behave differently. A sandwich surrounds a victim; a backrun follows a price-moving event and profits from the state it left. Arbitrage backruns a trade that pushed one pool's price out of line, buying cheap on one venue and selling dear on another. A liquidation backruns a price update that made a loan undercollateralized, repaying the debt to seize the collateral at a discount. These are competitive: many searchers race for the same opportunity, and competition normally grinds the extractable value down toward the cost of winning. Black Thursday is the case where competition broke, congestion locked most bidders out, and the liquidation MEV that is usually a thin margin became free collateral. Reading these forms means reading a block for what followed a price-moving event, and asking whether competition was present or absent.

Recorded loss

$8,300,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

It is free. We do not sell the list and there is nothing to buy at the end of it.