Maximal Extractable Value (MEV)
Maximal extractable value (MEV) is a measure of the profit a miner can make through their ability to arbitrarily include, exclude, or re-order transactions within the blocks they produce.
What Is Maximal Extractable Value (MEV)?
Maximal extractable value (MEV), previously called miner extractable value, is a measure of the profit a miner (or validator, sequencer, etc.) can make through their ability to arbitrarily include, exclude or re-order transactions within the blocks they produce.
Maximal extractable value (MEV) refers to the total profit that can be derived if transactions are ordered, included or omitted from a block. While it can provide additional revenue opportunities, it can also introduce a range of potential risks and challenges to the overall security, fairness and stability of a network.
MEV has become an increasingly relevant topic due to the growing popularity of decentralized finance platforms and the critical role they play in enabling complex financial transactions within blockchain ecosystems. As the volume and complexity of transactions on DeFi platforms have increased, so too has the potential for it to be exploited by malicious or opportunistic actors.
The concept can be traced back to the early days of blockchain technology, but it has become particularly relevant with the rise of Ethereum and its
smart contract capabilities. The flexible and programmable nature of the
Ethereum network has enabled a wide range of innovative financial products and services to be built on top of it, creating numerous opportunities for extraction by savvy or unscrupulous actors.
In contrast to
proof-of-stake chains,
proof-of-work chains like Bitcoin suffer from it significantly less. Since the Bitcoin network does not feature smart contracts, there are fewer opportunities for reordering transactions. Thus, a party looking to earn crypto from MEV opportunities will almost always do so in ETH rather than BTC.
Explaining MEV
One way to understand the concept is to think of it as the value derived from manipulating the transaction order in a block. This can include inserting or censoring certain transactions. Ethereum validators can select which transactions will be included in a block. They also have discretion over their order, which they can exploit to maximize their revenue.
MEV capitalizes on the inherent latency and competition of blockchain transactions. A transaction submitted by a user is broadcast to the network and waits for its confirmation in the
mempool.
Validators select transactions from the mempool and can prioritize the transactions with the highest fees. By strategically manipulating the ordering of blockchain transactions within a block, an actor with influence over the process can maximize their own profits at the expense of others.
Opportunities can arise from various factors, such as price differences between
decentralized exchanges (
DEXs),
liquidation events in lending platforms or other market inefficiencies. These opportunities can be exploited by parties who can influence transaction ordering.
The potential for extraction has raised concerns within the blockchain community, as it can create a range of problems, including the centralization of power, unfair advantages for certain network participants and threats to network security. Some of the most notable examples include
front-running, sandwich attacks and various forms of arbitrage.
Maximal extractable value is a critical concept with regard to miner incentives and network security. As the
DeFi space on Ethereum continues to grow and evolve, particularly following the merge of the old proof-of-work chain with the new PoS chain, addressing challenges will be crucial for ensuring the long-term security and fairness of the network. Solving this challenge will be a significant step forward for the cryptocurrency space as a whole.
Maximal Extractable Value vs Miner-Extractable Value
These two terms are often used interchangeably. However, maximal extractable value is a more comprehensive concept, as it applies to any actor with the ability to manipulate blockchain transactions, not just
miners.
MEV History
The topic emerged as a significant concern with the growth of decentralized finance (DeFi) platforms, which rely heavily on smart contracts and complex financial transactions. As DeFi platforms grew in popularity, it became increasingly clear that they could potentially be exploited, leading to a growing body of research and discussion around the topic.
The concept is not new but received increased attention as Ethereum rose in popularity, thanks to the development of
decentralized applications on the blockchain. The term "Miner-Extractable Value" was coined by researchers Phil Daian, Steven Goldfeder, Tyler Kell and Ari Juels in a 2019 paper called "
Flash Boys 2.0: Frontrunning, Transaction Reordering and Consensus Instability in Decentralized Exchanges." This paper brought attention to the potential risks and challenges and spurred further research and debate within the Ethereum community.
How Does MEV Work?
Opportunities can arise when actors with influence over transaction orders can benefit from them. Examples are price differences between DEXs or liquidation events in lending platforms.
The key idea is that transactions compete with each other for confirmation. When a user submits a transaction, it is broadcast to the network and placed in a pool of pending transactions known as the mempool. The transactions with the highest transaction fees tend to get prioritized by profit-seeking miners and validators. Thus, strategically manipulating the ordering of transactions within a block allows them to increase their profits at the expense of others.
MEV Searchers
MEV searchers employ automated bots to uncover profitable opportunities on decentralized exchanges (DEXs). They run complex algorithms and submit profitable transactions to the network quickly, ensuring they can capture the value before others do.
This leads to an interesting dynamic between searchers and
block producers. Since searchers pay high gas fees to guarantee their profitable transactions, up to 99.99% of the profit can go to producers. Thus, producers sometimes receive more than 90% of the MEV profit margin on top of the
block rewards. The more competition there is for an opportunity, the higher the incentives to engage in this practice.
MEV Examples
Frontrunning and Sandwich Attacks
Frontrunning in this context refers to
flashbots exploiting the trades of users through transaction order manipulation. These bots monitor the public mempool and submit transactions ahead of users. This results in higher
slippage for the user and a worse exchange rate for the desired
token swap.
In a sandwich attack, a frontrunner “sandwiches” a user’s transaction by submitting one transaction before and one after the user’s transaction. This maximizes profit, again at the expense of unsuspecting users.
Exchange Arbitrage and Liquidations
Arbitrage is a common market activity where an asset's price discrepancy between different exchanges is exploited to make a profit. It comes into play when bots monitor the transaction mempool, copy arbitrage trades, and pay higher fees to block producers to prioritize their transactions over the original ones. Similarly, extractable value is also involved in liquidations, where searchers or block producers use bots to identify and trigger the liquidation of
collateralized loans, capturing the liquidation rewards for themselves.
Generalized Frontrunning
A more advanced technique is generalized frontrunning, where bots scan transactions in the public mempool, replace addresses in the transaction payload with their own, and simulate the transaction execution to detect potential profits. By submitting identical transactions with higher fees to block producers, generalized frontrunners can capture the value without fully understanding the transaction's underlying purpose.
The Most Common MEV Attacks
NFT MEV
NFT extractable value is a prominent example of extraction strategies in the
NFT market. Searchers target NFTs listed at too low prices and often inadvertently so. They seek to acquire the NFTs at a discount, like in one example where a searcher spent $7 million to purchase every Cryptopunk at the price floor.
Liquidations
Aave and
Maker are popular lending protocols relying on searchers, which are liquidators in this context, to liquidate overcollateralized loans. Since the fastest party can extract MEV and earn a liquidation fee, there is fierce competition in the market. The liquidation charge is levied on the borrower, with a part of it going to the liquidator as a reward.
Uncle-Bandit Attacks
Uncle-Bandit attacks exploit uncle or
orphaned blocks. An uncle or orphaned block can be produced if two blocks with the same block number are mined and broadcasted simultaneously. Since the transactions within the
uncle block are public, they provide an opportunity for profit extraction. Searchers can submit bundle transactions directly to validators, avoiding front-running risks and incentivizing validators to include the bundle in their blocks.
Time-Bandit Attacks
Time-Bandit attacks threaten the integrity of the Ethereum network by auctioning the network’s state to the highest bidder. In such an attack, a searcher can uncover profit opportunities by monitoring the chain state and revealing opportunities in already mined blocks. The attack itself then consists of revalidating these blocks in order to extract the maximum possible value from already validated transactions.
MEV Pros and Cons
New
permissionless chains, like
Arbitrum, and proof-of-stake chains built on rollups seek to improve the downsides of MEV.
Pros of MEV
Mitigating Economic Inefficiencies
DeFi protocols benefit from rapid liquidations since they ensure a protocol’s correct functionality. A lender receives funds when a borrower falls below the required collateralization ratio. Moreover, this keeps token prices across the market in equilibrium and reflects the state of market demand accurately. As economically rational actors maximize their profits, this helps improve the efficiency and robustness of the DeFi ecosystem.
Enhanced Network Security
Since validators compete for block production opportunities, the network’s security is enhanced, as this competition encourages participants to invest in resources that strengthen the underlying infrastructure.
Cons of MEV
Negative User Experience
The effects of MEV can lead to a bad experience for users. For instance, a DEX sandwich attack can lead to higher gas fees and increased slippage for users. On the one hand, frontrunners willing to pay higher gas fees for their transactions can lead to network congestion, raising the cost of participation for all network participants. On the other hand, higher slippage worsens a user’s experience.
Potential Consensus Instability
It can also introduce consensus instability. If a block producer can earn more from MEV than from the block reward, they may have the incentive to reorganize previous blocks. This can undermine the blockchain network's consensus mechanism and threaten its overall integrity.
Contributor:
Stefan George has been an entrepreneur in the blockchain space for more than seven years. He is the CTO and co-founder of Gnosis, which builds new market mechanisms for decentralized finance. Gnosis has contributed leading infrastructure to the industry, including Gnosis Safe Multisig, a wallet solution that enables users to manage more than $29 Billion in digital assets, and Gnosis Protocol, a decentralized trading protocol that protects traders from arbitrage to deliver the best experience on Ethereum.