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Is MEV mining still a risk today? If so, what is the industry doing about it?
The maximum mineable value is closely associated with the Ethereum network, but in reality it can be problematic for any blockchain platform.
Known in industry jargon as MEV, the term refers to additional value which can be mined by block validators, or those who are responsible for creating new blocks of processed transactions that are immutably stored on the blockchain.
MEV can be achieved by manipulating the order in which transactions are processed. In many cases, block producers sequence transactions in order to increase their profits, and this practice often has a negative impact on other network users. There are many methods to do this, including front-running attacks and sandwich attacks.
The dangers of the MEV
For regular blockchain users, the primary risk associated with MEV is known as “on the front line”, where block producers pre-handle a significantly sized purchase order pending in the mempool with one of their transactions. They will place a similar buy order before the transaction to purchase that asset at a more favorable price. Once the order is filled and then the other large buy order is processed, the value of the underlying asset can increase significantly. The favorite can then sell the asset at a substantial profit.
A related strategy is known as “sandwich”, which is when the block producer places a buy order before and a sell order after a significant transaction that results in a price movement. This allows them to benefit from pricing pressure from both sides. Both of these strategies are considered malicious because they extract value from innocent internet users.
The state of the MEV today
There were concerns about the MEV first raised at the time, Ethereum was still in development as the world’s first smart contract blockchain. As a result, MEV became closely associated with Ethereum, which relied on a proof-of-work consensus mechanism at the time of its launch. At the time, only miners had the power to rearrange and exclude certain transactions to gain extra value.
As such, the term was originally known as “Miner-Extractable Value.” However, with Ethereum’s “merge” update in September 2022, it moved from the PoW consensus mechanism to a Proof-of-Stake algorithm, meaning that miners are no longer creating new blocks.
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However, the switch did nothing to stop MEV. Rather, it simply means that the door is open for other participants – such as validators – to participate in the MEV instead. With this transition, many have come to refer to MEV as “maximum extractable value.”
It is fair to assume that the main beneficiaries of MEV are block producers, but in reality almost anyone can – and does – participate in this process. In fact, it is believed that most of the value mined these days does not end up in the hands of block creators, but rather “researchers”, who are dedicated individuals who use special software to analyze blockchain transactions found in the mempool (where to wait to be processed) to seek profitable opportunities for MEV. They then try to partner with block producers to share the spoils.
Why is MEV still a problem?
While MEV has been known for a long time, even before the launch of Ethereum, the decentralized ethos of blockchain has prevented the industry from finding a comprehensive solution. Depriving block producers of the right to sequence transactions as they wish would go against the industry’s commitment to decentralization, meaning a more technical solution is needed.
Numerous teams have been working to create MEV solutions for years and have had some success. For example, in May 2021, Ethereum miners reportedly carried out mining approximately 140 million dollars in MEV in just 30 days. However, according to data as of May 10, 2024, the amount mined by users in the last 30 days dropped to just $2.4 million. data from Flashbot.
Ethereum is the main target of MEV techniques because it often suffers from network congestion, which means slow block times and higher fees. Additionally, it has the largest and most mature DeFi ecosystem in the industry, meaning it processes many complex transactions that can maximize profit opportunities for those engaging in MEV.
The majority of MEV losses stem from DeFi protocols such as Uniswap, Aave, and Compound, which are also targeted by a phenomenon known as “liquidation front-running,” in which researchers attempt to find and execute liquidation transactions to secure a part of the liquidator’s commission, which provides a large discount on the guarantee.
How is the industry combating MEV?
As awareness of the dangers of MEV grows, so do the strategies implemented by the industry to prevent its occurrence.
One approach that appears to have been very successful is the use of Fair sequencing services or FSS. It refers to a decentralized transaction ordering service that aims to ensure absolute fairness in how transactions are ordered, eliminating the possibility of MEV attacks. FSS is typically applied in Layer-2 rollups such as Arbitrum, enabling the scalability of the smart contract-based economy while minimizing the consequences of MEV on individual users.
An alternative idea is Flashbots, which is a blockchain research organization that has devised a transparent market for MEV mining. Essentially, it allows users to send transaction packets directly to block producers, reducing the harmful impact of things like gas price auctions to achieve more efficient MEV mining. With Flashbots, block producers are prevented from gaining excessive influence. Allows any participant to mine MEV via the mev-geth client. It provides all participants, regardless of their blockchain knowledge, to examine the Ethereum mempool and identify MEV opportunities, so they can reorder their blocks in the most profitable way.
It could be a more extreme and efficient solution Fully homomorphic encryption, which introduces full encryption of blockchain data, obscuring transaction participants and amounts from the process. By introducing completely confidential transactions, Fenix aims to eliminate the opportunity for MEV completely. Block producers will no longer be able to see transaction details, which prevents them from manipulating the order in which transactions are processed. It creates a much fairer environment for blockchain users, preserving the integrity of the network.
The beauty of Fhenix’s FHE solution is that it allows you to perform calculations on encrypted data without the information being decrypted first. This means it can also be used with the complex smart contracts that facilitate multi-step transactions in DeFi.
Eliminating MEV will bring great benefits to the blockchain community. First, it prevents anyone from front running and other actions that unfairly extract value from other network participants. In this way, FHE provides a strong guarantee regarding the fairness of transactions. Since block producers cannot see any transaction data, they instead process transactions according to the network’s rules, rather than using their discretion. Furthermore, it also prevents block producers from being able to censor the transactions of certain users.
Final thoughts
MEV may not be as big of a problem today as it was in the past, but the threat remains real. It provides an unfair advantage to those who practice it and can still have huge negative implications for some users, especially traders who make large volume transactions.
Some continue to argue that MEV benefits blockchain ecosystems by eliminating inefficiencies in how transactions are processed, helping to speed up the network as a whole. For example, when MEV users rush to exploit arbitrage opportunities, their actions will quickly result in price corrections in the DEX ecosystem. Likewise, lending protocols benefit from faster settlements in the event of loan default. As researchers rush to profit from the liquidation event, the collateral level of the defaulted loan is prevented from becoming too imbalanced.
Despite these benefits, the injustice of MEV remains acute. Front-running and sandwich attacks almost always lead to negative outcomes for regular network users, who are required to overpay transaction fees and execute their trades at disadvantageous rates, suffering from significant slippage. Additionally, MEV also leads to higher gas fees and slower transaction processing, as intense competition among searchers adds to network congestion.
Fortunately, the blockchain industry is making good progress against MEV, and with the advent of easy-to-implement solutions like FHE, we may not be far from the day when it ceases to be a problem altogether.
Disclaimer: This content is informational and should not be considered financial advice. The opinions expressed in this article may include the personal opinions of the author and do not reflect the opinion of The Crypto Basic. Readers are encouraged to do thorough research before making any investment decisions. Crypto Basic is not responsible for any financial losses.
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