Summary

Maximal Extractable Value (MEV), formerly known as Miner Extractable Value, refers to the strategy of adding, deleting, or reordering transactions when creating new blocks. MEV aims to make as much extra profit as possible. Block producers are best suited to this strategy due to their ability to select and order transactions.

However, other network participants (also known as searchers) may be affected if they discover MEV opportunities (such as arbitrage trading, front-running, or Forced liquidation of transactions), transactions can also be sorted by paying a fee. MEV is commonly found in networks that support smart contracts, where blockchain transactions contain more complex information.

Introduction

MEV is a cryptocurrency term used to describe the When a new block is generated (to be added to a blockchain), transactions are deliberately added, deleted, or reordered in order to gain as much profit as possible. You can think of it as extra value squeezed out of a block over and above the standard rewards and gas fees by choosing which transactions to add in which order.

MEV is often associated with the Ethereum network because Ethereum has an extremely important decentralized finance (DeFi) ecosystem . The more complex the transactions involved in a block (e.g., smart contracts related to lending or trading), the more opportunities there are for block producers to make additional profits (extract maximum value) by deciding to add, remove, or reorder certain transactions.

What is MEV?

The concept of MEV was mainly associated with the Ethereum network when it was first introduced. At that time, Ethereum used proof of work. (PoW) consensus mechanism. Therefore, miners have the power to reorder or add or delete transactions when producing blocks, and can use these choices to squeeze out additional value.

The term “miner extractable value” was coined to explain this phenomenon of extracting as much extra profit as possible. However, in September 2022, Ethereum completed its merger, and this technical upgrade converted the consensus mechanism of the Ethereum network from PoW to Proof of Stake (PoS).

In this way, new blocks on the Ethereum network are no longer created by miners, but by validators. However, PoS systems are not immune to MEV. Since the block is still being created, whoever chooses which transactions to add in which order will make decisions that extract as much profit as possible from the block. While the old MEV concept still exists, since it is no longer exclusive to miners, it now represents the maximum extractable value.

How does MEV work?

To understand how MEV works, you need to have an understanding of the role of block producers (whether miners or validators) A basic understanding. Block producers play a vital role in securing and maintaining the blockchain network by validating transactions and adding these transactions to the network in the form of blocks. Depending on the blockchain, this process is called mining or verification.

In short, block producers guarantee the integrity of transactions on the network and ensure that they continue to run. Without block producers, new data cannot be added to the blockchain. Block producers are responsible for collecting user transaction data and organizing it into blocks to add to the network chain.

It is important to note that which transactions are added to the block depends on the block producer. Logically, block producers would select transactions based on profitability, meaning those with high transaction fees attached would be prioritized. This is why users pay higher gas fees (or transaction fees) during busy times to ensure their transactions are prioritized. Block producers will make more profits if they choose the transaction with the highest transaction fees. Therefore, transactions with lower transaction fees will have to wait longer before being added to the block.

However, there is no requirement to select or order transactions based on transaction fees. When transactions contain more complex information (as they do in smart contract-enabled blockchains), block producers can add, delete, or reorder transactions to earn additional profits beyond standard block rewards and transaction fees.

For example, block producers selecting certain transactions over others and ordering these transactions in a specific way may result in arbitrage due to Opportunities or on-chain forced liquidation transactions to gain additional profits. The essence of MEV is the process of selecting and sorting transactions to obtain more economic benefits.

MEV Searcher

While MEV appears to be a strategy that only benefits block producers, in fact, a large amount of MEV is obtained by other participants, known as "seekers." These actors use MEV-specific operations to analyze network data to find MEV profit opportunities.

Searchers often pay extremely high gas fees to block producers to ensure that their MEV profitable trades and strategies are implement. Plausibly, block producers could receive up to 99.99% of the searcher's potential profit in gas fees, depending on competition for the MEV opportunity.

Take decentralized exchange (DEX) arbitrage as an example. It is known that searchers tend to pay their MEV earns over 90% of gas fees as this is the only way to ensure that profitable arbitrage trades are executed before similar trades.

Common examples of MEV

Arbitrage, front-running and forced smoothing Bin exchanges both provide searchers and block producers with the opportunity to profit from MEV. These examples will be carefully examined below to provide a detailed introduction to the concept of MEV and how it operates.

Arbitrage trade

When the price of an asset is inconsistent across trading platforms, arbitrage opportunities immediately arise. In the cryptocurrency space, the same token may be priced differently on two different DEXs. When someone (arbitrageurs) discovers this, they will take action to trade to profit from this pricing difference. MEV is generated when a searcher's bot recognizes a pending trade and inserts its own trade before it to extract the value provided by that arbitrage opportunity.

Front-running

Searchers and Zones Block producers can leverage their ability to sequence transactions within a block to get a head start on an important buy order that is still waiting to be executed in the trading pool. MEV is generated when a similar buy order is inserted before that transaction in order to obtain a more favorable price before the large buy order goes through, which will increase the price of that digital asset.

Similar MEV strategy is a "sandwich" strategy, which means placing a buy order before a specific price change transaction, and then Place a sell order after the trade, thereby profiting from price pressure from both sides.

Forced liquidation transaction

DeFi allows users to make loans using deposited digital assets as collateral. If the market becomes volatile and the value of the collateral falls below a certain price, the position will be liquidated. The smart contracts involved typically pay rewards or fees to transactions that trigger a liquidation.

This situation will generate an MEV opportunity. When any searcher or block producer running a bot discovers such a transaction, You can withdraw the reward value by inserting your own liquidation transaction into the block before anyone else does.

Conclusion: Advantages and Disadvantages of MEV

Since MEV participants are mainly In order to maximize profits, MEV is therefore a rational strategy. Some would argue that MEV benefits the entire ecosystem by ensuring that inefficiencies are corrected as quickly as possible.

For example, MEV searchers compete to be the first to extract value from arbitrage opportunities, thus causing prices between DEXs Get quickly corrected. Likewise, lending protocols don’t want risky loans to go unchecked if collateral levels are imbalanced, so pushing for MEV liquidation will encourage lender funds to be repaid as quickly as possible.

However, MEV also brings some problems that cannot be ignored. Some implementations, such as front-running and sandwich attacks, can negatively impact other users, who are forced to pay exorbitant fees on transactions, suffer higher slippage, or otherwise face value in what is essentially a zero-sum game loss.

Additionally, fuel may be triggered as MEV searcher activity competes to insert their transactions into blocks to capture the resulting value rising prices and network congestion.

Essentially, if the value of the reordered transactions in the previous block is higher than the reward provided by the next block And transaction fees, block producers will be committed to blockchain reorganization in order to obtain MEV profits, which is economically reasonable. However, this threatens the consensus and integrity of the network.

As the blockchain ecosystem continues to rapidly evolve, finding solutions to these MEV-related issues has now become a priority within the field. A core area of research and development.

Extended reading

• Comprehensive introduction to the Ethereum merger and upgrade

• What is a decentralized trading platform ( DEX)?

• Comparison between Proof of Work (PoW) and Proof of Stake (PoS)