Skip to main content

Maximal Extractable Value

Maximal Extractable Value (MEV) refers to a strategy to include, omit, or reorder transactions when making a new block to maximise profit.

All transactions on such networks first have to be added to a queue (mempool) in order to be picked up by the miner.

Due to limited block space to add transactions, the network is only able to process a limited number of transactions and needs a way to prioritise transactions.

The complication arises due to transactions being publicly available in a transparent queue.

It takes time for a transaction to be finalized (added to a block) and within this time, this information could be capitalized on by third-parties that can interpret the information and then propose a new transaction with a higher gas fee to get their transaction priotitized.

Charts:

Front Running​

The information is only valuable as long as the transaction has yet to be finalized, therefore confirmation duration sets the upper bound on the time value of a transactions information.

tip

ETH block times are approximately ~13 seconds

MEV is typically carried out by bots that do the following:

  • Monitor the transaction queue for transactions which meet their specific criteria
  • Calculate profitability based on available information. This will also have to take into account the gas costs
  • If there is a profit to be made, form a transaction based on the calculated parameters
  • Send the transaction with a higher gas fee to front-run the targeted transaction
  • Monitor the sequence of transaction confirmation as there is still the possibility of the target transaction being confirmed first. If so, cancel the MEV transaction

Due to the number of bots in competition this alogorithm must have optimal efficiency with low network latency to improve chances of success.

Profit​

Bots can submit a transaction with a prohibitively high gas fee but that would mean they significantly diminish their profits. Therefore bots incrementally outbid each other by monitoring other bot transactions. This means that lower latency provides a competitive advantage.

Strategies​

Sequencing strategies.

  • Sandwich Attack
  • Arbitrage
  • Sniping
  • Liquidation

Data Analysis​

Factors to measure that influence Total Extracted MEV strategies.

Individual Transaction MEV​

The value extracted from individual transactions.

Goal: It helps in understanding which transactions are most affected and are potentially high-value targets for MEV.

Number of MEV Strategies Employed​

The count of different MEV strategies like Sandwich Attack, Arbitrage, Sniping, and Liquidation being used.

Importance: It helps in identifying the most prevalent strategies and focusing on mitigating them.

Gas Fees​

The amount of gas fees paid for transactions.

Goal: High gas fees are indicative of potential MEV activities as bots are willing to pay higher fees to prioritize their transactions.

Transaction Confirmation Duration​

The time taken for a transaction to be added to a block and finalized.

Goal: It sets the upper bound on the time value of a transaction's information and is crucial for bots performing MEV.

Network Latency​

The delay in the propagation of transactions and blocks across the network.

Goal: Lower latency provides a competitive advantage to bots, and monitoring it can help in identifying abnormal activities.

Number of Bots​

The count of bots active in the network performing MEV.

Goal: It helps in assessing the level of competition and the prevalence of MEV activities in the network.

Profitability Analysis​

The profit made by bots after considering gas costs and other expenses.

Goal: It helps in understanding the economic incentives behind MEV and assessing the sustainability of such activities.

Sequence of Transaction Confirmation​

The order in which transactions are confirmed in a block.

Goal: Monitoring the sequence can help in identifying front-running and other MEV strategies.

Transaction Queue (Mempool) Analysis​

The state and composition of the transaction queue.

Goal: It provides insights into pending transactions and potential targets for MEV.

Frequency of Strategy Use​

How often specific MEV strategies are being used.

Goal: Identifying the frequency of strategies helps in understanding the prevalent methods and focusing on countermeasures.

Volume of Sandwich Attacks, Arbitrage, Sniping, and Liquidation​

The volume and value associated with each MEV strategy.

Goal: It helps in quantifying the impact of each strategy on users and the network.

Solution​

How to mitigate risk exposure.

Chainlink Fair Sequencing Services: It aims to enable a provably fair DeFi ecosystem by addressing the issues related to MEV.

Transparent and Fair Protocols: Developing protocols and mechanisms that ensure transparency and fairness can mitigate the impact of MEV.

Schema​