Miner Extractable Value (MEV)

Miner Extractable Value (MEV) is a term that has gained prominence in the blockchain space. To understand MEV, let’s first dive into the role of miners in the blockchain ecosystem.

Miners, validators, sequencers, and similar entities play a crucial role in securing and maintaining the integrity of blockchain networks. They are responsible for creating new blocks and including transactions within those blocks. In return for their efforts, miners receive rewards in the form of transaction fees and block rewards.

MEV refers to the potential profit that miners can earn by manipulating transaction inclusion, exclusion, and order within the blocks they create. It arises from the unique position of miners, who have the authority to organize transactions and choose which ones to include in a block.

One common example of MEV is front running. This tactic involves the use of bots to replicate users’ transactions with a higher gas price. By submitting these transactions, the bots ensure that miners prioritize their transactions over others. This unethical practice allows miners to generate profit by placing their own transactions just before users’, causing the users’ transactions to fail while their own transactions succeed.

For instance, imagine a user wants to buy a certain cryptocurrency at a specific price. They submit their transaction to the blockchain, but before it gets included in a block, a miner notices this opportunity and quickly places their own transaction with a higher gas price to execute the same trade. As a result, the miner’s transaction is prioritized, causing the user’s transaction to fail. The miner can then sell the acquired cryptocurrency at a profit, taking advantage of the insider knowledge gained from the user’s transaction.

Another form of MEV is back running. In this case, miners profit by strategically placing their transactions immediately after users’ transactions. By doing so, they can take advantage of the impact these transactions will have on market conditions. For example, if a user’s transaction is expected to cause a significant price movement, the miner can position themselves to profit from it by executing their own trade.

A sandwich attack is a combination of front running and back running. Miners use this tactic to profit from users’ submitted transactions by placing their own transactions both before and after the user’s transaction, effectively squeezing the user’s trade between their own.

It’s important to note that MEV is not inherently bad or malicious. Rather, it highlights the economic opportunities and vulnerabilities that exist within blockchain systems. The architecture of the Ethereum mempool, for example, enables these types of value extractions as miners are incentivized to include transactions in a block based on the rewards they will receive.

MEV has sparked discussions and research within the blockchain community as developers strive to find ways to mitigate its negative impacts. One proposed solution is the implementation of protocols that prioritize fairness and prevent miners from manipulating transaction order or taking advantage of users’ transactions.

While MEV is primarily associated with blockchain networks, it is worth noting that similar value extraction mechanisms can exist in other financial systems as well. However, blockchain technology has brought the issue to the forefront due to its decentralized and transparent nature.

In conclusion, Miner Extractable Value (MEV) refers to the potential profit that miners can earn through the manipulation of transaction inclusion, exclusion, and order within the blocks they create. MEV can take various forms, including front running, back running, and sandwich attacks. These tactics allow miners to exploit trading opportunities and profit at the expense of other users. The blockchain community continues to explore solutions to mitigate the negative impact of MEV and ensure fairer transaction processing.

Author: Stefan George, CTO and co-founder of Gnosis