What is MEV?
MEV (Miner Extractable Value) was first proposed by Philip Daian et al. in April 2019 in the paper “Flash Boys 2.0” and started to gain traction following the development of DeFi.
Miner Extractable Value refers to 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.
In other words, miners can pack transactions in Ethereum to generate blocks. In the resulting blocks, miners can also re-order, include, exclude transactions, and do other operations. In addition to transaction costs and block rewards, the value miners receive from these operations is MEV.
In DeFi, MEV mainly occurs in arbitrage transactions and liquidation. Arbitrage transactions, such as between different DEXs like Uniswap and Sushiswap, may contain arbitrage opportunities.
For example:
Suppose the appearance of a $10,000 USD arbitrage opportunity on Uniswap after a large trade led to a price slippage. At this time, the arbitrage bot notices this and submits the arbitrage transaction to the miners. Then, there are two possible outcomes:
1. The miner will duplicate and review the arbitrageur’s transaction. The miner will trade and pack the opportunity first. If the benefits are higher than the simple operating costs, there will be sufficient incentives for miners to participate;
2. Other bots will notice this arbitrage opportunity and bid a higher transaction fee to start a bidding war for the arbitrage. This kind of bidding is called a “Priority Gas Bid” (PGA);
The profit behind this $10,000 USD is MEV. If the miners do not participate in the trade and the bots compete in a PGA, then the difference between the auction’s settlement price and the total MEV is the winning trader’s profit (for example, if an arbitrage bot pays the miners $7,000 USD, the remaining $3,000 USD is reserved for the arbitrageur).
Most MEVs are PGA-type MEVs, just like Uniswap arbitrage. However, there are other types of MEVs, such as theft from vulnerable smart contracts. Dan et al. described an example in their “Dark Forest” article and found a smart contract with a vulnerability that allows anyone to steal money from it. Dan plans to recover money from the loophole before the thieves have time to steal the money. However, an arbitrage bot automatically recognized the opportunity and copied Dan’s transaction, giving higher transaction costs. The bot successfully executed the transaction before Dan and eventually took the money away.
As development progresses, MEVs will exist across all smart contract blockchains. One party will always be responsible for sequencing transactions, including non-miner participants, such as validators in ETH2.0 and aggregators on Optimistic Rollup. Therefore, Flashbots proposed that MEV should be referred to more broadly as Maximum Extractable Value, expanding its scope from Ethereum to cover other blockchain architectures while keeping the name of MEV. It is worth mentioning that MEV extraction in Ethereum today is mainly performed by non-mining DeFi traders and bots.
MEV’s definite negative externality to the blockchain ecosystem is the malignant effect on the gas bidding mechanism. As long as the MEV is large enough, the runners will be willing to pay gas fees hundreds of times higher than ordinary transactions through vicious competition. At the same time, block space will record a lot of failed high fee transactions, resulting in a waste of this scarce resource, block space, and a certain degree of network congestion.
This results in ordinary traders and searchers having certain negative experiences regarding MEV. In traditional finance, regulators impose legal constraints on the behaviors that disrupt the order of market transactions, such as rush trading; In the decentralized financial ecosystem, it mainly depends on the game between stakeholders and the technological upgrading of decentralized system to promote the reform or optimization of the market mechanism.
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