Have you been hearing a lot about MEV lately and are genuinely curious as to what it is? Let’s see. MEV is short for Miner Extractable Value. It’s the value that can be taken out of the system by miners or validators in blockchain systems. All of them have this function, in one form or another. How would the miners extract this value?
Well, they can do so by changing the sequence of transactions, including their preferred one, or discarding a competitor’s tx. Of course, that’s if they determine higher profitability to carry out the transaction first before everyone else.
And yes, it can become a problem. MEV can be exploited by miners, outside the normal block producing rewards and tx fees paid by the users for activity. It’s already done to some extent by bots and is fast becoming via recently written advanced smart contracts or scripts.
How does MEV work?
In the breakthrough article “Ethereum Is A Dark Forest”, authors Dan Robinson and Georgios Konstantopouloshere confirm the presence of generalized front runners bots looking to extract miner extractable value (MEV) lurking in the mempool – the place where all unconfirmed transactions are recorded before being included in the block.
After all, if there is a profitable transaction (arbitrage etc.) still lying unconfirmed and therefore in an unfinalized form, why shouldn’t anyone get theirs confirmed with higher gas and claim the rewards for themselves?
For instance, assume that you are planning to buy a certain asset on Uniswap. Since you are feeling FOMO, you increase the slippage limit. So even if the price of the asset goes up in the meantime, you wouldn’t be left with a reverted or failed transaction.
When your tx is sent to the mempool, a generalized front-running bot notices it. It then decides to extract the value for itself (or its owner by proxy). Later, the bot sends the same transaction with a higher gas fee, buys the asset, inflates its price, and sells back the asset to you. This is just one example.
What’s The Future?
For now, there are bots running in the mempool only. The “Ethereum Is A Dark Forest” article hints at another possibility that miners take advantage of the mempool situation and trying to benefit from the miner extractable value (MEV) by themselves. How so? They can perform the same operation more effectively. That’s because it’s possible to change the order of transactions or discard the transaction to profit from an opportunity.
Their actions, if taken to the extreme, can reverse transactions through block reorganization, which can cause chain instability and ultimately chain halt, if not checked. The advantage enjoyed by miners means that they can directly include transactions in a block (even at low fees – miners are known to mine their own txs at 1 gwei already), so all these bots wouldn’t notice and therefore wouldn’t have time to react and miners can extract this value directly by acting first – even copying the actions of these bots and delaying their transactions or discarding them.
MEV is a novel risk, which came to light due to the rise in complexity and value of blockchain transactions, it’s an unavoidable part and some form of MEV would always be there. However, the developers and communities are working to mitigate its value, minimize opportunities where they are created, and/or democratize access so everyone can nearly the same opportunity.
This post may contain promotional links that help us fund the site. When you click on the links, we receive a commission - but the prices do not change for you! :)
Disclaimer: The authors of this website may have invested in crypto currencies themselves. They are not financial advisors and only express their opinions. Anyone considering investing in crypto currencies should be well informed about these high-risk assets.
Please also note our Non-liability disclaimer.
Trading with financial products, especially with CFDs involves a high level of risk and is therefore not suitable for security-conscious investors. CFDs are complex instruments and carry a high risk of losing money quickly through leverage. Be aware that most private Investors lose money, if they decide to trade CFDs. Any type of trading and speculation in financial products that can produce an unusually high return is also associated with increased risk to lose money. Note that past gains are no guarantee of positive results in the future.
More from Blockchain
The Cardano project is very close to rolling out its smart contracts feature called Alonzo. IOHK, the development team behind …