MEV: Everything You Need To Know
[TL; DR]
MEV is the acronym for Miner Extractable Value or Maximal Extractable Value.
MEV refers to the extraction of value from the Ethereum blockchain.
The Extraction process involves reordering, inserting, and censoring transactions.
MEV is the amount of value some actors such as miners and searchers earn to the detriment of the Ethereum blockchain users.
MEV was first discovered as a flaw that will affect the Ethereum protocol by Pmcgoohan.
Pmcgoohan called the attention of Ethereum developers in 2014, and by 2015, the Ethereum protocol was launched without correcting the MEV flaws.
In 2019, some researchers released the “Flash Boys 2.0” paper to highlight the problem caused by the MEV to Ethereum.
In 2020, Georgios Konstantopoulos, Dan Robinson, and Samczsun also published an article to create awareness about MEV.
The Ethereum protocol gave Miners the autonomous power to decide which transaction will be included in the mining blocks.
This autonomous power made miners one of the actors of MEV alongside validators and sequencers.
Over $689 million has been extracted from Ethereum users’ transactions using the MEV technique.
Keywords: Ethereum, MEV, miner, maximal extractable value, deductions, blockchain.
[Full Article]
The Ethereum network is a decentralized protocol on the blockchain network that enables developers to build other Decentralized Finance (DeFi) protocols. The smart contract with rules governing the Ethereum blockchain and other DeFi protocols built on it is quite robust.
It contains some mechanisms and activities that are beyond individual comprehension. It takes an expert breakdown and explanation to understand how those mechanisms work, and since it directly affects the users, it is essential to understand them in simple terms.
One of those ambiguous mechanisms is MEV.
Not to worry, in this article, we shall explain everything you need to know about MEV.
Let's begin!
What Is MEV?
There are two meanings to MEV; it either stands for Miner Extractable Value or Maximal Extractable Value. Whichever way the term is used, it refers to the extraction of value from Ethereum.
The extraction process involves reordering, inserting, and censoring transactions within blocks in the blockchain. MEV refers to profits that users earn by extracting value from the Ethereum protocol.
While you are making a profit as a user, the Ethereum protocol is recording it as a loss, affecting DeFi users interacting with automated market makers and other DeFi apps on the Ethereum blockchain.
The Miner/ Maximal Extractable Value (MEV) only requires the miner to reorder, re-insert or censor existing transactions within blocks, and they will be able to extract a certain value (profit) with minimal effort.
MEV is regarded as an invisible tax on users because Ethereum users are unaware of the reason for the deduction.
The Genesis Of MEV
Image: Halborn
PmcGoohan, an algorithmic trader and analyst coder, was the first to discover Miner or Maximal Extraction Value in Ethereum in 2014. The discovery came a year before the public launch of Ethereum.
Pmcgoohan discovered that the MEV mechanism is flawed and will pose a severe issue to the Ethereum blockchain when he got hold of Ethereum’s pre-Genesis draft documents.
Pmcgoohan described it as a critical flaw because the protocol gave miners total control of transaction inclusion and the ordering process. Miners' control meant they had the power to extract value from most Ethereum users who were unsuspecting of the deductions.
Pmcgoohan called the attention of Ethereum developers and warned them to correct the flaws before the protocol went live. The warning fell on deaf ears, and the Ethereum protocol was launched without reducing this miner extraction powers.
Similarly, in 2019, some researchers published a paper titled "Flash Boys 2.0". The paper highlighted the Miner/ Maximal Extraction Value details and emphasized the problem earlier raised by Pmcgoohan.
In 2020, Georgios Konstantopoulos, Dan Robinson, and Samczsun published several articles 2020 to highlight the severity of MEV. They were out to enlighten Ethereum users on the “invisible” extraction and make it known to the entire world that the Ethereum research community has been battling the issue to date.
Until this set of scholars publicized the idea behind MEV, several Ethereum users were unaware of the deductions. Research shows that to date, only a handful of users are still aware of the Miner Extraction Value (MEV).
Moving forward, we shall identify how the extraction occurs on the Ethereum blockchain.
How MEV Occurs And The Participant Actors.
Image: Boinnex
The Ethereum protocol gives full power to the miners to select and aggregate transactions into blocks. These miners have the autonomy to decide which transactions will be included in the blocks they are mining.
That is, among the pending transactions or transaction mempool, the miners can decide which transactions they want to verify.
Instead of miners, validators, and sequencers selecting and ordering transactions fairly, they tend to optimize profit by selecting and ordering transactions with the highest gas fees or transaction fees. These actors can also decide to reorder the transactions and extract additional profits from users. This entire process is how MEV occurs.
However, some misconceptions exist about the occurrence and processes involved in this extraction. Some think MEV is exclusive to the Proof of Work (PoW) mechanism, conducted by miners, or associated with Ethereum.
The Maximal Extraction Value is not peculiar to the Ethereum blockchain alone; it exists on all smart contract-enabled blockchains. In smart contract-enabled blockchains, a party is always responsible for transaction ordering, and they are the ones that extract these values.
These are mere assertions because searchers, arbitrage traders, and bot operators do the bulk of MEV; these individuals are central to the MEV game. They are keen on identifying MEV opportunities and extracting the values from unsuspecting users.
Validators in the Proof of Stake-based protocols and rollup providers also engage in MEV. In cases, end-users, such as individuals who take on-chain loans or trade on decentralized exchanges, also involve themselves in MEV.
Conclusion
The MEV procedure is lengthy and requires several actors. The process involves identifying and monitoring the Ethereum blockchain for transactions that have the potential of being extracted. These actors go as far as using bots and automation tools.
According to Fleshbot Data, over $689 million has been extracted from unsuspecting users on the Ethereum network, and experts opine that the figure will continue to increase.
The more the Ethereum users become aware of MEV, the more likely they will stop using the Ethereum protocol. Little wonder, Pmcgoohan said the MEV auctions would kill the Ethereum network.
Author: Valentine. A, Gate.io Researcher
This article represents only the researcher's views and does not constitute investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted, provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
