MEV (Miner ExtractableValue), or roughly Miner Extractable Value (or Validator Extractable Value), is the extra profit that miners (in Proof-of-Work networks) or validators (in Proof-of-Stake networks) can extract from a block, beyond the standard block rewards and transaction fees.
How does MEV work?
Think of a transaction block as a page in a ledger. It is the miners or validators who decide which transactions are included on that page and in what sequence. As the ones who finalize the blocks, they are in a privileged position to observe and manipulate the flow of pending transactions (known as the mempool).
MEV arises from:
- Arbitrage: This is the most common form. A trader (or bot) notices a price difference between the same asset on two decentralized exchanges (DEXs). For example, ETH might be cheaper on DEX A and more expensive on DEX B. The trader initiates a trade to buy ETH on DEX A and sell it immediately on DEX B. The miner/validator, seeing this arbitrage opportunity in the mempool, may decide to insert his own arbitrage trade before the initial trader’s (a practice called front-running) or take advantage of the arbitrage.
- Liquidations: In DeFi loan protocols (such as Aave or Compound), if the collateral value of a loan falls below a certain threshold, the loan can be liquidated by anyone. Liquidators often receive a portion of the collateral as a reward. Miners/validators can observe liquidation trades in mempool and insert their own liquidation trade before others to claim the reward.
- Front-running and sandwich attacks:
- Front-running: miner/validator observes a large transaction in mempool. He knows that this trade will influence the price of the asset. Thus, he places a buy order of his own before the big trade (taking advantage of the price increase) and then, a sell order after the big trade, benefiting from the difference.
- Sandwich Attack: This is a form of front-running in which the miner places two trades around a victim’s big trade: a buy order before and a sell order after, “sandwiching” the victim’s trade and profiting from the price movement induced by it.
Role of miners/validators
Miners/validators have the power to:
- Reorder trades: they can change the order of trades in a block to maximize their profit.
- Include/Exclude trades: They can choose which trades to include in a block, favoring those that offer the highest MEV.
- Insert their own trades: They can insert new trades into the block they are building.
These actions are profit-driven and are not necessarily technically “illegitimate” within the protocols, but can lead to a negative experience for regular users (worse prices, increased slippage).
Impact of MEV
- Higher costs for users: ordinary traders may pay higher prices or receive less for their swaps due to front-running or sandwich attacks.
- Potential centralization: the race for MEV can lead to a “nuclear arms race” between large miners/validators who have technological advantages and superior resources, potentially centralizing power in the network.
- Network instability: In extreme cases, MEV can lead to “reorgs” (chain reorganizations), where entire blocks are removed and replaced to include more profitable transactions for miners/validators, affecting network stability.
- Opportunity for innovation: the recognition of MEV has spurred the development of solutions to reduce its negative impact, such as “Flashbots” networks, which allow traders to send trades directly to miners to avoid public mempool and reduce front-running.
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