How to Send Private Transactions on Ethereum

Written by Alchemy

Reviewed by Brady Werkheiser

Published on 2022-09-075 min read

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The Flashbots API overcomes Maximal Extractable Value (MEV) issues like frontrunning, making it a useful solution for private transactions. MEV refers to the profit that is extracted through adding, censoring, or reordering blockchain transactions. MEV can result in frontrunning attacks on traders where a transaction is copied by a frontrunner and placed ahead of the original transaction in the mempool. 

The Flashbots API offers builders and traders mechanisms to ensure that transactions are not accessible in the public mempool, (i.e. a public pool of pending transactions that are propagated across Ethereum nodes, and from where miners and block builders select transactions to be mined). Because private transactions are not sent to the public mempool, they are protected from frontrunning.

In this article, we detail the issue of frontrunning in the context of MEV, demonstrate how the Flashbots API works to prevent frontrunning, and explain how to send and cancel a private transaction over Ethereum.

What is Maximal Extractable Value (MEV)?

Maximal Extractable Value (MEV) refers to the potential profits that block producers in a blockchain network gain based on their ability to include, censor, or re-arrange transactions in blocks. 

Since blockchains do not enforce rules on the order of the blocks or contents of transactions, block producers are responsible for building a block and adding it to the chain. This means block producers can include, exclude and reorder transactions based on how much a sender is willing to pay. 

The profits gained by block producers under MEV include ‘conventional’ profits from transaction and block fees as well as ‘unconventional’ profits such as:

1. Transaction reordering - searchers insert their transactions ahead (frontrunning), behind (backrunning), or ahead and behind transactions (sandwich attacks) to extract value from arbitrage opportunities.

2. Transaction censorship - censorship attacks enable searchers to deny transactions from being confirmed by sending competing transactions that get mined first.

These opportunistic techniques have led MEV to become a million dollar industry.

Miner Extractable Value was the original term to denote this concept, however, Miner-Extractable Value has been replaced by Maximal Extractable Value due to Ethereum’s switch to a Proof-of-Stake model where validators, instead of miners, stake ETH and produce blocks.

What is frontrunning?

Frontrunning, also known as a Priority Gas Auction (PGA), occurs when an entity that is observing the mempool identifies a trading opportunity that it wants to copy, and sends a competing transaction with a higher gas fee to ensure its transaction is included ahead of the original transaction.

By submitting a transaction with a higher gas fee to a block producer, frontrunners can capture the value that another entity identified for themselves. The block producer could also choose to omit the original transaction in order to capture this trade opportunity for themselves.

Frontrunning can result in a “slippage” where there is a discrepancy between the expected number of tokens to be received and the actual number received. When a trader frontruns an initial transaction, the price change is triggered before the initial transaction is executed. This results in a failure of the initial transaction, or a lower number of tokens that the initial transaction receives.

Frontrunning is one of the main issues that arises from MEV, and can result in various problems including reducing the security of blockchains, overloading the network and increasing transaction fees.

What is Flashbots?

Flashbots is a research and development organization aimed at reducing existential risks and negative externalities resulting from MEV. Flashbots aims to reduce the impact of MEV on users in three ways: 

1. Increasing the transparency of information

2. Democratizing MEV extraction

3. Distributing profits to system participants 

The Flashbots organization is divided into three core efforts:

• Flashbots Auction, a private communication channel between miners and searchers for transparent and efficient MEV extraction. 

• Flashbots Data, with a suite of tools to reduce information asymmetry and increase MEV transparency

• Flashbots Research, a collaborative and open research effort to tackle various aspects of MEV.

How does Flashbots work?

While the original Flashbots product was mev-geth, a forked version of the go-Ethereum (geth) client software used by mining nodes in building blocks, mev-boost is the current iteration that Flashbots uses to reduce the negative impacts of MEV. 

MEV-Geth offers a sealed-bid block space auction mechanism for communicating transaction order preference. Its design ensures that transactions are permissionless, with no intermediary to censor transactions. MEV-geth also ensures that MEV extraction is carried out without unnecessary chain congestion. Additionally, MEV-geth ensures pre-trade privacy where transactions are known publicly only after they have been included in the block and failed trade privacy, where losing bids are never included. 

Mev-geth allowed miners to outsource the work of finding MEV opportunities and building the most profitable block to other parties, called searchers and relayers.

Searchers are specialized entities that find profitable MEV opportunities and pass them to a relayer. A relayer receives the bundle and validates the transaction before passing it to the miner for inclusion in the block. Once a miner receives the bundle, it is included in the Flashbots private transaction pool for inclusion in a block rather than going through the public mempool.

Like mev-geth, mev-boost allows for permissionless MEV extraction. Both allow block proposers, to outsource block production. However, the mev-boost design has added benefits of the Builder API, block builders, escrows and validators.

The Builder API is a piece mev-boost middleware that facilitates interactions between validators and block builders. The Builder API allows block builders to send an ‘execution payload header’ - a cryptographic commitment to the block’s total value - to the validator for signing. The ‘execution payload header’ prevents validators from stealing the block’s content and reproducing it to capture MEV.

A block builder is an entity that invests in specialized hardware necessary for resource-intensive block production. A block builder receives a transaction from searchers and ensures the block is made to be as profitable as possible.

Then, the escrow receives block contents from the relayer, ensuring data availability for the validators.

Finally, validators are staked participants who propose blocks for certain slots. Once the block is added to the chain, the validator receives transaction fees and MEV tips.

What is a private transaction?

Private transactions are transactions sent directly to validators or block proposers, instead of public mempools, and is one way traders can avoid exposing their transactions to frontrunning attacks. A mempool is a shared pool of pending transactions that is known by all nodes on Ethereum’s peer-to-peer network. Pooled transactions are chosen to be included in the next block by a validator. 

Private transactions are not visible in the public mempool but are instead sent directly to validators and transactions are not broadcasted to the public mempool before being added to the chain. Private transactions therefore enhance the privacy of traders’ activities and strategies. 

How do private transactions prevent frontrunning?

Because private transactions are not included in the public mempool, and their transaction details, such as gas, traded tokens and volume, are hidden from MEV bots, frontrunners cannot frontrun the transaction. 

Without knowing the value of a trade or the gas required to frontrun the transaction, MEV bots are not financially incentivized to target a private transaction of an unknown size since the risk is potentially higher than the reward. 

How does a private transaction work on Ethereum?

A private transaction is sent as a single transaction directly to the validators through Flashbots to bypass the public mempool. Flashbots attempts to send the transaction to validators for 25 blocks, and users do not have to listen for the next block and resend the transaction themselves.

How to Send a Private Ethereum Transaction

With Alchemy’s Flashbots API, traders are able to use the eth_sendPrivateTransaction endpoint through Alchemy’s RPC nodes to send a private Ethereum transaction.

Before sending a private Ethereum transaction with Alchemy’s RPC nodes you will need to create an Alchemy account and Ethereum app to get your private API key.

Here is an example of a private Ethereum transaction using the eth_sendPrivateTransaction method:

How to Cancel a Private Ethereum Transaction?

Private transactions can be canceled with the eth_cancelPrivateTransaction method if the cancellation request is sent through the same Alchemy app/API key that the eth_sendPrivateTransaction call was sent to initially.

Once a transaction is submitted from the relay to a miner, it cannot be recalled by Flashbots. However, Flashbots can cancel submitting transactions for future blocks.

Here is an example of a private Ethereum transaction using the eth_sendPrivateTransaction method:

Conclusion

The article has explained the issue of frontrunning as well as how Alchemy’s Flashbots API helps mitigate it. We have demonstrated how Flashbots works, and how to use Alchemy to send and cancel private Ethereum transactions.