Maximal Extractable Value

Maximal Extractable Value (MEV) in blockchain refers to the maximum value extracted by miners or validators from a specific block through transaction manipulation. It is also known as an invisible tax, typically collected from crypto users when miners manipulate transactions by rearranging or excluding them on the blockchain.

The concept of MEV originated in 2014 when an anonymous algorithmic trader known as Pmcgoohan highlighted transaction rearrangement in the mempool. This practice, aimed at benefiting miners, gained further attention in 2019 when researcher Phil Daian and colleagues published a paper titled Flash Boys 2.0.

• Maximal Extractable Value (MEV) is a blockchain activity that exploits the order of transactions to gain multiple rewards in terms of fees, providing additional incentives for miners.
• The concept of MEV was originally proposed by algorithmic trader Pmcgoohan in 2014. It gained further attention when Phil Daian and his colleagues published it in their Flash Boys 2.0 article in 2019.
• Blockchain ecosystems can mitigate the risk of MEV through tactics like Fair Sequencing Services (FSS), off-chain transactions, batching, and the implementation of advanced protocols.

Maximal Extractable Value (MEV) plays a significant role in the proof-of-work mechanism. It enables miners to exploit a block and maximize profits by accessing coins multiple times. Miners or validators manipulate the order of transactions in a block to extract maximum rewards, creating a loophole for exploiting transactions. Validators can select transactions based on the highest fees from the mempool and prioritize their order, facilitating manipulation and leading to MEV accumulation until the block is fully exploited.

Manual selection is possible since maximal extractable value attacks are observable on Ethereum. Validators can choose transactions based on the highest fees from the mempool and prioritize their order, enabling manipulation. With an actor's influence, validators can easily manipulate or change the order again, leading to continued reward accumulation until the block is fully exploited.

MEV exploitation often involves blockchain validators outsourcing block creation to specialized networks of seekers, constructors, and intermediaries. Seekers identify MEV opportunities and bundle transactions, which constructors then assemble into complete block payloads. Intermediaries pass these blocks to validators.

Let us look at some examples of maximal extractable value to comprehend the concept in a better way:

Example #1

Imagine a group of Ethereum miners looking for new ways to boost their earnings. They find the opportunity with the introduction of the Ethereum Improvement Proposal or EIP-1559 version. They have increased fee revenue using miner extractable value (MEV) strategies.

With MEV, they utilize specialized software and a private mempool to identify profitable trading opportunities on the Ethereum network. They analyze MEV data to strategically order transactions, allowing them to take advantage of trading opportunities through methods like arbitrage and front-running. This enables them to increase their revenue beyond traditional fee structures.

Example #2

Suppose there's a cryptocurrency exchange where A wants to buy 1 Bitcoin from B for $30,000. At the same time, C wants to sell 1 BTC to D for $30,300.

• The miner rearranges the order of transactions in the mempool, prioritizing C's sell order before A's buy order.
• The miner executes C's sell order first, selling 1 Bitcoin to D for $30,300.
• Immediately after, the miner executes A's buy order, buying 1 Bitcoin from A for $30,000.
• The miner pockets the price difference between the two transactions, which is $30,300 (from selling to D) minus $30,000 (from buying from A), resulting in a profit of $300.

Some methods to reduce the occurrence of maximal extractable value attacks are:

• Fair sequencing services (FSS): One method to avoid maximal extractable value attacks is through FSS. As the name suggests, FSS promotes a fair method of assigning order or rank to the transactions. Thus, the chances of MEV are significantly reduced. However, it is primarily used in Layer 2 rollups for improved effectiveness.

• Off-chain transactions and batching: Another strategy used by blockchains is off-chain transactions. Here, off-chain refers to the transactions that occur outside the blockchain. So, if users want to trade, they can submit their order in the off chain. Later, it gets bundled and authorized together. Thus, if there is a chance of order replication, it is identified and removed from the block list. Likewise, even batching is a fruitful tool as the transaction fees are reduced by more than half. In other words, the gas fees payable was reduced, decreasing the MEV activities. 

Following are some advantages and disadvantages of MEV prevalent in the blockchain ecosystem. Let us look at them:

Pros:

• Reduces economic inefficiencies in DeFi protocols.
• Miners and validators can gain more profits or block rewards.
• Allows participants to capture arbitrage opportunities, leading to accurate market pricing.
• Incentivizes validators to create more blocks and maintain the blockchain.

Cons:

• Chances of exploitation and fraud exist in the blockchain with MEV.
• Not all users may have access to the resources needed to perform MEV.
• Creates security threats and transparency issues for crypto users.
• The process may lead to centralization among nodes in the network.

This article has been a guide to what is Maximal Extractable Value (MEV). Here, we explain its examples, pros, cons, and how to mitigate it. You may also find some useful articles here –

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