Maximal Extractable Value Guide – What Is MEV?

Cryptocurrency has been powered by the might of blockchain technology since its origin, enabling entities to perform transactions with each other without having to work around with a middleman.

The speed of processing a transaction is determined based on the type of blockchain and consensus functionality being utilized, so in parallel with an associated blockchain and its connected consensus, transaction speeds can range from seconds to hours, given the circumstances.

Talking more about the consensus functionalities being used, currently there are two that have the spotlight, Proof-of-Stake (PoS) and Proof-of-Work (PoW).


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The way all this works is that the transactions needed to be processed sit in the networks waiting space named as the mempool, where they scheduled to be chosen by either a miner or a validator to obtain a block space. After that is done, that block goes through validation through nodes and gains a spot on the blockchain.

Now, according to our topic in focus, with the transactions having a seat in the mempool, different entities like miners and validators have gone their way to take advantage of their existence and obtain a side profit, which depends upon how they handle the transaction, and there is where the concept of Maximum Extractable Value (MEV) kicks in.

MEV is known to be a fresh development in the financial sector and several different research teams are working hard to deduce a counter to it. The Ethereum foundation has claimed that various techniques of MEV are known to be malicious, developing bad uses cases, however some techniques have assisted the network in a positive manner.

As of now, the concept of MEV is largely connected with the Ethereum blockchain due to its extensive popularity, but the Ethereum blockchain is not the only one experiencing this, as mentioned before, this concept can exist on all blockchains.

Although the concept might be a bit less rough on the Bitcoin blockchain due to the abundance of smart contract features, it makes other popular blockchains like Ethereum to become a prime target for it.

Now that we have some background about the concept of MEV, lets dive a bit deeper and learn about what this concept holds.

About Maximal Extractable Value (MEV)

Maximal Extractable Value (MEV) is often called by the term “hidden charges” which entities like miners can obtain from different users performing transactions. It is basically the best of charges that a miner can toll on users to work on their transactions with priority and guaranteeing their transaction to be published on the blockchain.

This type of move was initially sought out back in the year of 2014, when a trader having the alias of “Pmcgoohan” figured out that entities like miners can move around transactions as they please, in order to extract some extra charges from users, without anyone noticing.

The trader posted on reddit forums that miners can acquire all details like contract code and the transaction processing stack, questioning about how these types of operations can be halted on Ethereum blockchain applications.

Popular researcher, Phil Daian worked with a team to shed more light on this matter about three years ago when they managed to publish a paper by the name of “Flash Boys 2.0” and then properly connected the term MEV to associate it as the maximum charges that Ethereum miners can manage to acquire in a certain time period.

The concept managed to shine even brighter with two other researchers that posted a blog two years ago highlighting more on the matter. The blog mentioned that the mempool surrounded by Ethereum is a dangerous place due to the rise in competitiveness levels and the shady techniques that are utilized to obtain the MEV.

According to some sources, the amount of MEV being acquired by miners on the Ethereum blockchain has recorded to have reached more than $650 million in value, but other individuals think that this value is still vague and there should more to it than that. The value mentioned has been recorded, originating from the starting month of the year 2020.

MEV Function

MEV is obtained by utilizing several different techniques on different blockchains, however we will have out focus towards Ethereum for now. MEV initially originated through the consensus method of Proof-of-work in which miners have authority over the stack and addition of transactions onto a block. This is where the term was first given its name, Miner Extractable Value.

Now that Ethereum is moving from Proof-of-work to Proof-of-Stake, the techniques utilized to acquire hidden charges will still exists, however the first word in the term MEV has been shifted to “Maximal” instead of “Miner”.

Studies from the Ethereum foundation have stated that entities like miners and validators are the only ones that can obtain the complete MEV, as both have the sight to confirm that an MEV has been completed.

However, the Ethereum Foundation noticed that the majority of the MEV is acquired by individuals on the network known as the “searchers” that can fire up complicated network algorithms to determine the best MEV possible and make bots do their job for them.

The Ethereum Foundation added that alongside the searchers, miners and validators can obtain a good chunk of the MEV acquired because searchers have the power to provide large amounts of gas fee, so that they can gain priority towards potentially rich transactions located in the block.

Techniques of Drawing out MEV

As mentioned before, there are several different ways that MEV can be acquired from transactions and below mentioned are said to be the most popular ones being utilized.

  1. Front-Runners

Adding more from the previous section, the searchers take advantage of automated bots also called as “Front-runners” to search out mempools for transactions that are rich.

When such types of rich transactions are pointed out, the front-runner can produce duplicates of those transactions that will include a larger amount of gas charges, leading different miners to give priority to those transactions.

But not all is bad in this technique, because several parties have been looking to make a positive use case for this technique. A party by the name of “Flash Bots” drives a service which improves the communication level between users and miners which helps them to allocate transactional stacks in a block.

The Ethereum foundation has stated that this service from Flash bots has managed to tone down front-running, basically providing a more balanced system to handle MEV operations.

  1. Sandwich Strike

This technique is known for its malicious nature. This way of MEV extraction is an enhanced version of front-running, but it is utilized to push influence over price valuations of different cryptocurrencies. This happens when searchers can point out highly valued transaction located on a decentralized exchange (DEX).

The searcher then reallocates different transactions on the front and behind of that highly valued transaction, basically forming a sort of fake price fluctuation, producing profit from it. With the fake change in price active, the number of cryptocurrencies obtained by the user will be different, letting the searchers to take advantage of that price fluctuation and gain out it.

  1. Dex Arbitrage

Decentralized exchanges possess different tokens that have changing price valuations that depend upon the level of need they carry. If a high change in price valuation is detected across exchanges, bots used by MEV operations purchase the tokens that have their prices dropped and the proceed to sell of those tokens through a different exchange at a profit.

Because of this, the token price valuations gain stability across different exchanges, helping decentralized finance to gain efficiency.

As positive this technique can be, there is a negative side to it, as according to a report from two years ago, a trade had managed to take advantage of the varying prices of coins across a variety of exchanges, letting the person gain a hefty amount of around $40,000.

  1. Liquidation

Decentralized Finance loaning services make users submit an amount of cryptocurrency that can act as collateral. If users are not able to submit the value loaned on time, service will usually give any individual the apply some liquidation to the collateral, to which then the user loaning will have to pay the charges associated with the liquidation.

Searchers challenge each other to select the best loaners, through which they can acquire the liquidation charges as per the ruling.

  1. Time-Bandit Charge

This type of attack is usually conducted by miners which allows them to reallocate blocks in order to acquire potential MEV chances. This usually happens with blocks that have already been mined. If miners think that there is sufficient MEV, they can sabotage the consensus to obtain the potential MEV that is present in the blocks.

To better understand this, we can take the example of a miner that has managed to pinpoint a massive $30,000 in block numbered 50 which has a depth value of three. What miners do is that they do not mine fresh blocks, but they choose to mine block number 50 again to have a chance at that massive valuation, plus having a more stretched out chain to work on.

MEV Regarding POS Ethereum

As Ethereum has moved towards Proof-of-Stake, a massive shift has occurred such that validators are not able to acquire the positions that were initially undertaken by miners.

Miners had the job to process the transactions and push the blocks into the chain, which required quite a massive load of power and hardware to accomplish, but as validators have started to make their way into the new positions, they utilize more efficient hardware also stake Ethereum through smart contract systems.

Because of the process of validators becoming much more trivial than before, especially after the shift to PoS, a massive number of fresh individuals have made their way into Ethereum that do not possess the sufficient expertise and hardware to operate blocks that are MEV compatible, in comparison to the miner.

So, because of this, the shift towards PoS has managed to develop the environment that accommodates a fresh MEV technique known as the Protocol/Builder Separation (PBS) method.

The PBS method basically separates the duties of validators into two parts, block construction and block proposal. As of now, this method is utilized by services such as Flashbots and is expected to be imposed at the main protocol of Ethereum in the coming time.

This move will mainly be adopted to promote more decentralization and Ethereum is looking to remove the centralization aspects introduced by MEV in order to achieve a stage which does not harm its move towards more decentralization.

The state of MEV

As mentioned before, the information shared by Flashbots has revealed that around $600 million or more has been negatively acquired from the users that are unaware of the practices since the start of the year 2020.

Including the various number of strikes, MEV is said to be included in the most highlighted problems that were related to the Proof-of-Work consensus previously followed by the Ethereum blockchain.

Many researchers and traders have highlighted that MEV could potentially ruin the Ethereum blockchain. While these individuals maybe focused on the negative aspects of MEV, it is important to note that there are many negatives to MEV that must be kept in mind.

The notorious issue of the hidden charges has been plaguing the network for quite a while now, affecting many users around the world. Because each penny from MEV is a loss for users, some traders have indicated MEV as an act of stealing.

Another issue is of MEV causing chaos in the Ethereum protocol. If the MEV manages to outweigh the block prizes, then it causes validators to sabotage the consensus, so if they can reallocate transactions from the past blocks, the main concept behind the use of a blockchain becomes rather a pointless mess.

MEV might have been plaguing the network and affecting gas fee, however this issue is actively being countered by the services provided by entities like Flashbots, that assist users with personal relays to promote off-chain transaction and block bids.

According to the latest debates involving the United States Treasury imposing sanctions towards smart contract powered protocols like Tornado Cash, the services could be heavily affected by this action and would have to present more to operate.

With the sanctions in place, there is a possibility of unexpected acts to be held for such protocols, having either massively negative consequences on the Ethereum network or it could lead to a better level of decentralization all around.

Can MEV be avoided?

To address this question, two different sides of view exist. The first side thinks that MEV cannot be stopped, so the cryptocurrency space must try to mitigate the effects or must develop workaround the issues all around.

The comes the other side number two which thinks that the issue of MEV can be concluded, so the space must work more on it to find ways to entirely avoid it. So, there is this huge confusion on how to deal with the ongoing MEV issue.

As for the Flashbots service, it sits with the first side and thinks that MEV cannot be avoided, so it has been developing several different services and utilities to handle MEV and bring more eyes towards its existence. Flashbots has managed to present utilizes such as MEV-GETH and MEV-boost.

Some think that MEV-Geth promoting the concept of Front-running as a Service (FaaS) is advantageous, as it removes the negative aspects like large transaction charges and network load, meanwhile also handling the value that was missing during the EIP-1159 upgrade. Other individuals think that the concept of FaaS involves stealing.

Many have researched for both sides, while some individuals like Pmchoohan have stated that the issue of MEV is indeed resolvable if there is more transparency over the mempool.

Looking at side number two, which look to remove MEV, various solutions have been in development such as ChainLink’s Fair Sequencing Service and Automata Network’s Conveyor. In addition to this, keeping block constructors and block proposers away from each other also contributes towards removal of negative aspects surround MEV.

Conclusion

Analyzing this entire concept, there is still a huge confusion spread, where different sides of opinions have formed, and are not able to deal with the MEV issue.

Techniques like front-runners and sandwich strikes are dangerous and cause issues like large gas charges and massive network load, however techniques like DEX arbitrage are seen to bring more benefits to the users bringing much more fairer price valuations throughout any different exchanges.

There have been many entities that are working towards either mitigating the negative effects of dangerous MEV methods or removing the concept of MEV entirely, but a standalone solution still has not emerged.

Although, with Ethereum moving towards a much eco-friendlier Proof-of-Stake consensus system, solutions like the Protocol/Builder Separation (PBS) have the potential to bring a much more positive impact on the Ethereum blockchain, helping it to resolve many past issues.


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