What is Maximum Extractable Value (MEV)?

MEV is the abbreviation of “Maximum Extractable Value” (maximum extractable value). This term refers the profits that can be made by including, excluding or changing the order of transactions in a block of a blockchain.

The concept of MEV was first anticipated in 2014 by an algorithmic trader under the pseudonym Pmcgoohan. It warns the community that miners could quietly rearrange transactions within the mempool for personal gain.

This notion came back to the fore in 2019, when a team of researchers led by Philip Daian published a study called “Flash Boys 2.0”. It is in this study that the term MEV appears as an acronym for ” Miner Extractable Value “. Since Ethereum’s transition to Proof of Stake, the MEV today corresponds to the “Maximum Extractable Value”.

The phenomenon is gaining popularity within the crypto community following the publication of “Ethereum is a Dark Forest”, an article by Georgios Konstantopoulos and Dan Robinson, and “Escaping the Dark Forest”, an article by Samczsun. Published in August and September 2020 respectively, these writings highlight the challenge that MEV poses to developers of Ethereum and other blockchains.

Today, although the Ethereum blockchain has moved to Proof of Stake, the MEV has not disappeared.. Miners have been replaced by validators, who are also able to exploit the RAM and attempt to generate profits in various ways.

According to the Flashbots tool, more than $685 million has been generated since the beginning of 2020 by bots and miners/validators on Ethereum through the use of various transaction reorganization methods.

Figure 1: Evolution of profits generated by mining MEV on Ethereum since January 1, 2020

Also according to data from Flashbots, the most used vector to mine MEV is none other than Uniswap, one of the main protocols in decentralized finance (DeFi). Himself, it concentrates more than 80% of all VPD-related transactions. Other commonly targeted protocols are Balancer, Curve, and Aave.

Although Ethereum is often mentioned to describe the MEV, this blockchain is not the only one affected by this phenomenon. However, as this concentrates the vast majority of transactions relating to the extraction of the MEV, it is the privileged example in this article.

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To better understand – What is a blockchain mempool?

It is important to specify that the practices presented below are generally considered to be unethical or maliciousand many blockchains have adopted provisions to prevent or mitigate their use.

The front running

Front-running is a practice where bots scan the mempool of a blockchain in search of profitable transactions.. As soon as an opportunity is detected, the bot will replicate a user’s transaction with more gas fees so that miners/validators favor this transaction over all others.

The sandwich attack

A sandwich attack refers to a certain type of front-running often used to manipulate cryptocurrency prices and generate profits. A sandwich attack can occur when a bot detects a large pending transaction on a decentralized exchange (DEX). The bot then places a trade just before and just after this one to profit from an artificial price change.

Here is an example to illustrate this situation: a user places an order to swap 1,000,000 LINK tokens into UNI tokens on Uniswap. The order is then placed in the mempool. A bot created for this purpose then detects the transaction and places two orders: a transaction that pays high gas fees to buy LINKs before the user’s transaction is validated, then another transaction to sell the previously purchased LINKs once the user’s transaction has been committed:

• Transaction 1: the bot executes a large buy order, which causes the price of the token to rise;
• Transaction 2: the victim buys the token at a higher price;
• Transaction 3: the bot resells its tokens, taking advantage of the price difference.

The amount of damage that the victim of the bot will have to pay is determined by the “slippage” entered during his transaction, that is to say the percentage of price difference that he is ready to accept between the creation of his transaction and its execution.

The reorganization of transactions

Transaction reordering refers to a practice by miners/validators of changing the order in which transactions are processed within a block. By prioritizing certain transactions, miners/validators can extract additional value from the fees associated with those transactions.

Selfish mining

Selfish mining refers to a miner “holding up” newly mined blocks on the network in order to give yourself an advantage over other miners/validators. By withholding blocks, a miner can potentially be awarded a larger share of the reward from said blocks.

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What really happens when a block is created?

When a validator is chosen to produce a block, a series of events occur before that block is added to the network.

First you have to build the block by gathering and ordering the pending transactions. A validator can build the blocks himself, but this often comes down to proposing blocks that do not produce RAM.

That is why there are dedicated block builders (called “block builders”), independent of proposers or validators (“block proposers”) whose role is to create blocks optimized for the MEV from pending transactions.

Block builders will then send blocks to proposers (or validators) in the hope of receiving a portion of the profits generated by the SRM when the block is added to the network.

That’s what we call the separation of “builders” and “proponents” of blocks or PBS (for Proposers/Builders Separation).

The PBS allows to:

• Limit the risks of censorship and centralization by validators. The latter cannot themselves select the transactions they wish to include in a block;
• Promote value creation of product blocks through the competitiveness of block creators.

Today the PBS is achieved through the separation of proposers and builders of blocks. Nevertheless, it is not directly implemented in the Ethereum consensusbut by external systems. It is planned to integrate the PBS at the consensus level in the future.

So in practice, here is what happens in the context of an MEV transaction:

• A user submits a transaction;
• The transaction joins the “mempool” where all the transactions awaiting validation are grouped;
• Block creators compete to come up with the most optimized blocks to create value from mempool transactions;
• Block creators send their block proposals to one or more relays;
• Blocks can be selected by a validator or proposer who will propose the block to the network.

The expert’s opinion Emmanuel Nalepasenior infrastructure engineer at Kiln :

“EVD is a complex and exciting subject, but also very sensitive in our ecosystem. Indeed, this process can favor the censorship of certain applications or transactions. With our entire community, it is therefore important to continue to work on these issues of transparency, separation between the different actors to guarantee ever greater decentralization without forgetting the interests of our customers in search of the best rewards. »

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Conclusion: is VPD beneficial or harmful?

It is accepted that a certain level of MEV is necessary for the proper functioning of a blockchain, as this provides more incentive for miners/validators to secure the network and process transactions. Without this incentive, it is likely that fewer miners/validators would participate in the network, which could potentially lead to a decrease in its decentralization and security.

However, there are concerns about miners/validators abusing the MEV in a way that is inconsistent with the interests of other users. For example, if miners/validators are able to preempt transactions or rearrange transactions in a way that benefits them at the expense of other users, this could lead to an unfair distribution of value within the network.

MEV has attracted attention in recent years because it is likely to create conflicts between miners/validators and users of a blockchain.

Therefore, researchers and developers have explored ways to mitigate the negative effects of VPD, including through the use of VPD redistribution mechanisms. For example, a tax may be levied when miners/validators complete SRM transactions. The proceeds of this tax are then paid back to the users who produced this MEV.

Generally, the impact of SRM on a blockchain will depend on the specific practices and incentives in place. It is important that blockchains have measures in place to ensure that SRM is aligned with the interests of the wider community and is not misused by a small number of players.

Source: Figure 1: Flashbots

Editor-in-chief of bitcoinlinux, I discovered Bitcoin and blockchain technology in 2017. Since then, I have been striving to share quality content so that the sector becomes more democratic for everyone.

Clement Wardzala

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