MEV: Everything to Know
By Beluga Research July 12, 2023
- Miner Extractable Value (MEV) refers to the profits that miners can potentially extract from the order execution and transaction ordering process in blockchain networks
- Miners control the order of processing allowing them to front-run trades, perform arbitrage or execute other strategies to exploit price discrepancies
- MEV has raised ethical concerns as it enables miners to extract value at the expense of other users
- It's important to note that the landscape around MEV is constantly evolving, and researchers, developers, and the wider blockchain community are actively exploring ways to address its challenges and create a more equitable and efficient ecosystem.
Miner Extractable Value (MEV) is the profits miners can potentially extract from the order execution and transaction ordering process in blockchain networks. It refers to the maximum value that can be extracted from block production by manipulating and changing the order and timing of transactions in a block.
A Brief History
In the 2019 research paper entitled "Flash Boys 2.0," the authors of which include Chainlink Labs researchers Ari Juels and Lorenz Breidenbach, MEV and transaction reordering are not just explained as a theoretical concept, but a dynamic is already in play.
Financial gains are achieved by miners through changing the transaction timing or status via front-running on decentralized exchanges. This can have a significant impact on financial gains and the users end price (whether buying or selling). By the start of 2021, the cumulative value of MEV extracted on the Ethereum network reached $78m, which then shot up to $554m by the end of the year.
What Is MEV?
Miner Extractable Value, or MEV, is defined as a cryptocurrency miner's ability to structure and position blockchain transactions in order to gain additional revenue for themselves. Miner extractable value allows miners to choose trades with higher fees and negate trades with lower fees. While blockchains may be immutable, there is no guarantee that transactions will be validated in the order they were submitted to the blockchain, allowing miners (to a certain extent) to reorder transactions as they wish.
The only motivation for miners to include block transactions are the gas fees they will obtain. Naturally, this means they would take measures to prioritize trades with higher fees for increased profits.
However, MEV manipulation generally comes at the expense of other market participants, who must wait longer and pay more for trades. These extended waiting times can lead to slippage, a difference in price between what a trader intended to purchase an asset for and the actual price they pay, creating a substantial disadvantage for the trader.
- Understand a blockchain network. To understand MEV, it's important to learn about the role of miners, transaction ordering, front-running and other strategies that enable profit extraction in blockchain networks.
- Dive In. Researching academic papers, articles, and resources dedicated to MEV to gain a deeper understanding of the topic is key. Also, follow and join relevant online communities, forums, or social media channels where discussions and developments related to MEV take place. MEV auctions further provide an opportunity for users to participate in the MEV extraction process.
- Explore intricacies. How MEV auctions work, how to participate, and the potential risks and benefits involved is crucial. Lastly, engage with the broader blockchain community to discuss and exchange ideas about MEV. Participate in relevant conferences, workshops, or meetups where MEV is a topic of discussion. Engaging with experts, developers, and researchers in the field can provide valuable insights and foster collaboration.
On a blockchain, a block is added to its chain only after the validators agree upon a given order of transactions and reach a consensus. However, each actual specific block is created by a participant known as a miner. The miner is in control of where they wish to place the transaction in a certain block. MEV allows miners to place the transaction in a block in a sequence of their choosing, where they can profit off of a transaction, migrating towards the highest gas fees.
Since validators mostly agree upon the block with a higher gas fee, the then prioritized block is more likely to be added to the chain. Front-running, back-running and sandwiching are some of the distinct ways that miners use to make more money.
Front-running often uses "searchers" who utilize bots called "generalized front-runners" to scan the mempool (temporary holding area for pending blockchain transactions) for profitable transactions. Once a profitable opportunity is detected, the bot will replicate a user's transaction with a higher gas price so miners will choose that transaction over others.
Sandwich trading, also referred to as a sandwich attack or sandwiching, is an MEV strategy in which two bots are used to essentially surround a targeted transaction. A large transaction has the potential to move a token's price. Therefore, the bots are used — one to place an order before the large transaction, and another to order after the transaction. By doing so, the searcher can exploit the transaction to generate a profit.
Back-ending involves the practice of miners or validators intentionally delaying the execution of certain transactions or interactions within smart contracts to maximize their profit potential. It involves strategically timing the inclusion of transactions in blocks to exploit time-sensitive opportunities and gain an advantage over other network participants.
- Rewards miners and validators . Block producers serve an essential purpose on blockchains. These blockchain networks simply cannot function without efforts to verify transactions. And these services aren't available for free. Gas fees and other incentives are used to reward them for their efforts. In many cases, this is how block producers/miners earn a living.
- Ethereum PoS validators . Ethereum's PoS (proof-of-stake) consensus allows any user who stakes 32 ETH to create a node and become a validator. Previously, with PoW (proof-of-work), this wasn't possible. But users with enough ETH can now take advantage of MEV profits. While this possibility is available to far more users than it once was, it's important to note that MEV still requires exceptional skill. Some users who have enough tokens to stake may not have the technological expertise required.
- Corrects system inefficiencies. As a result of MEV, block producers and searchers can improve the system by correcting inefficiencies. For example, price corrections can be made quickly through a focus on arbitrage opportunities. In addition, efforts to identify riskier loans (in the case of DeFi lending) and help lenders recoup their assets on loans sooner. MEV is often viewed as having negative consequences for users, but it can be beneficial to users in identifying and addressing inefficiencies.
- Network destabilization and congestion . Because block producers have full control over the ordering and inclusion of transactions, they can determine priorities and detract from users' best interests without their knowledge. This may impact users' confidence in placing transactions on the blockchain. MEV also adds extra transactions to the network, which can result in network congestion.
- Diminished user experience . Some MEV opportunities, including sandwiching and front-running, result in escalating transaction prices and slower processing of other users' transactions. As a result, some users may overpay for their transactions. In addition, by adjusting the ordering of transactions, slippage can also impact the profitability of some transactions for the user.
- Concerns about fairness and transparency in Decentralized Systems . This can disrupt the principle of equal opportunity for all participants and introduce an element of centralization, as miners gain additional control over transaction outcomes and can prioritize financial interests.
- Ethical considerations . The extraction of MEV has ethical implications. It involves miners using their privileged position to exploit information asymmetries, potentially harming other users. This has prompted discussions within the blockchain community about the need for ethical guidelines and responsible practices.