One aspect of blockchain that has garnered a lot of attention in recent years is the maximum mineable value, or MEV. MEV refers to the profit that can be made by manipulating the order in which transactions are processed within a block. What are the methods used to extract the MEV? Is SRM good or bad for a blockchain ecosystem?
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 MEV concept was first anticipated in 2014 by an algorithmic trader under the pseudonym Pmcgoohan. He warns the community that miners may well rearrange transactions within the mempool for personal gain.
This notion made a comeback in 2019, when a team of researchers led by Philip Daian released 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 the transition of Ethereum 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 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 Miners have been replaced by validators, who are also able to exploit RAM and attempt to generate profit in various ways.
According to the Flashbots tool, more than 685 million dollars have been generated since the beginning of 2020 by bots and miners/validators on Ethereum through the use of various methods of rearranging transactions.
Figure 1: Evolution of profits generated by MEV mining on Ethereum since January 1, 2020
Also according to Flashbots data, the most used vector to undermine MEV is none other than Uniswap, one of the main protocols of decentralized finance (DeFi). Himself, concentrates over 80% of all VPD-related transactions. Other commonly targeted protocols are Balancer, Curve and Aave.
While Ethereum is often cited to describe MEV, this blockchain is not the only one affected by this phenomenon. However, since this concentrates the vast majority of transactions related to MEV mining, it is the preferred example in this article.
👉 To better understand: what is a blockchain mempool?
It is important to specify that the practices presented below are generally considered as such unethical or harmfulAnd many blockchains have put in place provisions to prevent or mitigate their use.
The running front
Front-running is a practice in which bots scan a blockchain’s mempool for profitable transactions.. As soon as an opportunity is detected, the bot will replicate a user’s transaction with multiple 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 makes a trade just before and just after this to profit from an artificial change in price.
Here is an example to illustrate this situation: A user places an order to exchange 1,000,000 LINK tokens for UNI tokens on Uniswap. The order is then entered into the mempool. A bot created for this purpose then takes over the transaction and places two orders: one transaction that pays high gas fees to buy LINKs before the user’s transaction is validated, then another transaction to sell previously purchased LINKS once the user’s transaction is validated. the user’s transaction has been confirmed:
- Transaction 1: the bot executes a large buy order, which drives up the price of the token;
- 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 bot’s victim will have to pay is determined by the “slippage” entered during his transaction, i.e. the percentage of price difference he is willing 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 refers to a miner who “locks” newly mined blocks onto the network to give you an edge over other miners/validators. By holding onto blocks, a miner can potentially receive a larger share of the reward from said blocks.
👉 What is DeFi? All about decentralized finance
Conclusion: Is VPD Good or Harmful?
It is accepted that a certain level of MEV is required for a blockchain to function properly, as this provides more incentives 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 inconsistent with the interests of other users. For example, if miners/validators are able to pre-empt transactions or rearrange transactions to benefit 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 adverse effects of VPD, including through the use of VPD redistribution mechanisms. For example, a fee may be imposed when miners/validators complete SRM transactions. Proceeds from this fee are then returned 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: Flashbot
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