Crypto networks aim to provide decentralization and transparency, but there’s a hidden issue called Miner Extractable Value (MEV). In 2021, Ethereum miners and operators earned approximately $730 million from MEV activities. While some consider MEV a natural reward for miners, others argue it harms fairness and trust. This article from SwapSpace CEO Andrew Wind sheds light on how MEV works, as well as how it impacts on crypto networks.

Miner Extractable Value is the maximum profit miners or validators can achieve by reordering, censoring, or including specific transactions within a block. It’s a hidden force in crypto networks, where transaction ordering directly affects outcomes, especially in DeFi.

Example!* In January 2023, a bot on the Solana blockchain transformed about $70,000 into roughly $1.9 million in just 20 seconds through a back-running strategy.*

MEV gained attention with Ethereum, where smart contracts and decentralized exchanges introduced exploitable opportunities. Historically, MEV became prominent as bots began front-running trades, submitting transactions just before others to profit, by analyzing pending transactions in the mempool.

Interesting fact! In 2022, arbitrage bots took advantage of price differences in the Uniswap V3 liquidity pool, making around $85 million in profits.

Miner Extractable Value exploits the way transactions are processed in blockchain networks. When users submit transactions, they enter a mempool (a waiting area for pending transactions). Miners or validators choose which transactions and in what order to include in the next block, based on incentives like gas fees. This control allows them to reorder, include, or censor transactions to maximize their profit.

Key players include:

1. Miners/Validators: These are the key players in the blockchain who control the creation of new blocks. Miners (on proof-of-work networks) and validators (on proof-of-stake networks) can manipulate the order of transactions within a block to maximize their earnings from MEV strategies. They can reorder, insert, or even exclude transactions based on what is most profitable for them, often taking advantage of opportunities like front-running, back-running, or sandwich attacks.

2. Bots: Automated programs that scan the blockchain’s mempool –– the collection of unconfirmed transactions –– to find profitable opportunities. Bots are designed to exploit price discrepancies, such as those created during arbitrage or liquidation events. These bots are essential for executing complex MEV strategies quickly and effectively, often making profits within seconds.

3. DeFi Users: These are the everyday participants in decentralized finance who are often the victims of MEV exploitation. When users make transactions, such as trading on a decentralized exchange, bots and miners/validators can manipulate the transaction order, leading to higher costs like slippage or unfavorable prices. Thus, while DeFi promises fair access to financial services, users often pay hidden fees due to MEV strategies.

A classic example of MEV is front-running: a bot detects a pending trade on a decentralized exchange, places a similar trade with higher gas fees to get priority, and profits from the resulting price movement. For instance, the MEV bot called "jaredfromsubway.eth." detected a pending trade of 2 ETH for a token and placed its own buy order, front-running the user's transaction and profiting from the price movement.

MEV significantly affects crypto networks, with consequences that influence users, miners, and the ecosystem as a whole.

Economic impact

MEV creates an uneven playing field. For instance, sandwich attacks on decentralized exchanges can cost unsuspecting users hundreds of dollars in slippage. In one example, a trader intended to swap 0.25 ETH for a token on Uniswap DEX. When the trader's transaction was executed, they received fewer tokens than expected, incurring a loss due to the price impact caused by the bot's actions.

Ethical concerns

MEV acts as a hidden tax on users. Regular traders often lose out to bots and miners exploiting their transactions. This erodes trust in the fairness of crypto networks, particularly in decentralized finance, which aims to be equitable.

Network congestion and fees

MEV strategies often drive up gas prices, making it expensive for average users to transact. For example, during periods of increased MEV activity, gas prices can spike by more than 10-20 times the standard levels, as multiple MEV bots bid for each profit opportunity. This surge in gas fees can make it significantly more expensive for users to perform even simple transactions, creating an unfair environment.

Centralization risks

High MEV rewards incentivize the formation of miner groups or validator collusion. This weakens decentralization by giving more power to those who can exploit MEV the best. Overall, MEV disrupts the fairness and openness that blockchain systems aim for, causing regular users to bear financial and ethical consequences.

Interesting fact! In October 2023, an MEV bot operating on the BNB Chain executed a flash loan attack on the BH/USDT trading pair on PancakeSwap, resulting in a profit of $1.575 million. The attack involved borrowing funds without collateral, exploiting price discrepancies between different exchanges. The bot's actions led to significant financial losses for other traders and highlighted vulnerabilities in DeFi platforms.

Currently, MEV has multiple challenges, such as:

• Centralization risks. As said, high MEV rewards encourage miner groups and validator collusion. For example, validators on proof-of-stake networks may prioritize MEV over fairness, concentrating power and reducing decentralization.

• User experience. MEV strategies inflate gas prices and penalize regular users. During an MEV surge in 2023, gas fees on Ethereum reached $100 for basic transactions, making the network unaffordable for many.

• Fairness. MEV exploits give bots and miners an unfair advantage over users. For instance, sandwich attacks manipulate token prices, forcing users to buy at inflated rates or sell at lower ones, effectively draining their funds.

• Security concerns. MEV can lead to time-bandit attacks, where miners reorganize past blocks to extract more value. This undermines blockchain security by stimulating selfish mining.

MEV represents a "hidden tax" that impacts everyday users while rewarding exploitative behaviors. Without intervention, MEV could drive users away from crypto networks, undermining their core ethos of fairness and decentralization.

Efforts to mitigate Miner Extractable Value focus on reducing its harmful effects while preserving blockchain integrity. Protocols like Flashbots have emerged to mitigate MEV by creating private transaction pools, but they’ve also made MEV more accessible, increasing its prevalence.  Thus, one approach involves private transaction pools like Flashbots, which prevent bots from monitoring the public mempool. By routing transactions privately, Flashbots aim to reduce MEV while still allowing miners to profit transparently.

Interesting fact! As of 2023, over 90% of Ethereum miners adopted Flashbots, drastically reducing public mempool attacks.

Another strategy is protocol-level changes. EIP-1559, introduced in Ethereum, stabilized gas fees and partially reduced front-running opportunities by creating a predictable fee structure. Future solutions like Proposer-Builder Separation (PBS) aim to split the roles of block proposers and builders, minimizing the power of any single entity to extract MEV.

Layer-2 solutions like Optimism and Arbitrum also help by processing transactions off-chain, making them less visible and less prone to exploitation.

Despite these efforts, MEV persists; in 2023 alone, MEV extraction on Ethereum exceeded $1.5 billion, suggesting mitigation is an ongoing challenge. While these tools and ideas show potential, completely eliminating MEV might not be possible. The goal is to reduce its harmful effects without taking away the rewards for miners.

The future of MEV will likely revolve around balancing innovation and fairness. As blockchain ecosystems evolve, new mitigation strategies like PBS and encrypted transaction pools could further limit MEV. These innovations aim to separate transaction ordering power from those validating blocks, reducing potential abuses.

However, MEV isn’t just an Ethereum issue. On Solana and Binance Smart Chain, MEV strategies have become increasingly common, with bots extracting millions of dollars in 2023 alone. This suggests that MEV mitigation must expand beyond Ethereum to address multi-chain environments.

Another future focus is automation. Tools like MEV auctions could allow users to capture some of the value that would otherwise go to miners. For instance, platforms like CowSwap already use batch auctions to reduce front-running, giving power back to users.

As more capital enters crypto networks, the incentives to exploit MEV will increase, forcing the industry to innovate continuously. Ultimately, the future of MEV lies in striking a balance: creating tools that limit exploitation while ensuring miners remain incentivized to secure the network.

Miner Extractable Value exposes the hidden problems in crypto networks. It affects fairness, decentralization, and trust. Efforts to reduce MEV, like Flashbots, EIP-1559, and PBS, have made progress, but still face challenges. As the crypto world continues to grow, MEV will remain a major issue that needs constant attention. The goal is to balance network security and fairness, so crypto networks can live up to their promise of being decentralized and transparent for everyone.