Difference between revisions of "MEV"

This protocol doesn't hold back miners with any rules in regards to following this specific process. Miners have a lot of flexibility and can weaponize their power to manipulate transactions, thus pulling additional profits from users. This makes an “irregular” stream of revenue for miners, commonly known as miner extractable value or MEV.

Front-runners look through submitted transactions, always looking to find arbitrage opportunities that have the highest potential ROI. These front-runners pay the miners increased gas fees for the same transaction to benefit from arbitraging — of course, the miners select those transactions which have the highest gas fees assigned to them.

A user places an order for 10 ETH on a DEX, with each ETH token equating to 1,000 USDT — therefore, the total transaction amount equals 10,000 USDT. The user’s order will increase the price by a certain amount, and the miner can execute the order that falls in front of that specific transaction. This refers to front-running, as mentioned before.

This shows the concept of MEV. While it may present fantastic opportunities for miners and arbitrageurs, there are inherent issues that the average retail investor suffers from as a result.

A major problem with MEV is that it often disincentivizes DeFi traders to execute transactions and exchange tokens on DEXs because miners can extract a hefty portion of their overall trade. Even worse, many DeFi traders are completely unaware of this problem. MEV also undermines Ethereum as a protocol given that it comprises the certitude and permanence of blockchain transactions. More than $600 million of value has been extracted from traders through MEV in 2021 alone. While DeFi and crypto have their benefits over traditional finance, they open the door to what could be considered deceptive practices. However, it can be fair to say that miners and arbitrageurs are simply taking advantage of the system that’s been put in place while maintaining the network that’s been put forth. In essence, MEV is the hidden tax on users that miners put in their pockets.

MEV might soon be unusable as Ethereum will soon switch from Proof of Work (PoW) to Proof of Stake (PoS). Since MEV is mostly done by validators who stake their ETH, if any validator tries to commit fraudulent activity, the validator's stake will be slashed, meaning some of the staked eth (or rewards) will be subtracted from the validator's stake.

Flashbots is a research and development organization working on mitigating the negative externalities of Maximal Extractable Value (MEV) extraction techniques and avoiding the existential risks MEV could cause to stateful blockchains like Ethereum. Their focus is to enable a permissionless, transparent, and fair ecosystem for MEV extraction. This falls under three goals: Bringing Transparency to MEV Activity, Democratizing Access to MEV Revenue and Enabling Fair Redistribution of MEV Revenue.

1- https://ethereum.org/en/developers/docs/mev/