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Maximal Extractable Value

A multi-billion dollar opportunity to resolve in DeFi.

Maximal extractable value (MEV), previously called miner extractable value, is a measure of the profit a miner (or validator, sequencer, etc.) can make through their ability to arbitrarily include, exclude or re-order transactions within the blocks they produce

Crypto Protocols​

ProjectSource Code
Cow SwapGithub

Flow of Value​

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

The MEV supply chain involves specialized entities collaborating off-chain to construct and propose blocks that maximize rewards from transaction ordering.

Relays play a key role in connecting builders and proposers while ensuring fair block auctions. This modular structure aims to promote decentralization and fair access to MEV.

Charts​

Entities​

The key entities and their roles in the MEV supply chain are:

  • User: The user initiates a transaction with the intent to enact a state transition on the blockchain.
  • Wallet: The wallet encodes the user's intent into a transaction that the blockchain can understand. It may route the transaction to a public mempool or a private system.
  • Searcher: Searchers monitor user transactions from various sources and convert them into complex transaction types like bundles to extract MEV. They submit these bundles to builders.
  • Builder: Builders receive transactions from searchers and the public mempool. They simulate and construct full blocks that maximize the rewards from transaction fees and MEV. Builders submit their candidate blocks to relays.
  • Relay: Relays receive blocks from multiple builders. They pick the block with the highest bid/profitability for the current proposer and forward it to them. Relays ensure builders submit valid bids.
  • Proposer: The proposer, usually a blockchain validator, receives the most profitable block from the relay. They sign and broadcast this block to be included in the blockchain.
  • Blockchain: The proposed block is added to the blockchain, finalizing the user's intended state transition.

Strategies​

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 algorithm must have optimal efficiency with low network latency to improve chances of success.

Latency​

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.

Sequencing​

  • Sandwich Attack
  • Arbitrage
  • Sniping
  • Liquidation

Benefits​

MEV (Maximal Extractable Value) can have some positive aspects in proof-of-stake (PoS) systems, despite its controversial nature:

  1. Economic efficiency: MEV helps correct market inefficiencies by quickly arbitraging price discrepancies across decentralized exchanges (DEXs), leading to more accurate asset pricing[5].
  2. Protocol solvency: MEV actors enable rapid liquidations on lending protocols, helping to maintain the solvency and stability of DeFi platforms[6].
  3. Network security: The potential for MEV rewards provides additional incentives for validators to participate in block production and maintain network security[2][6].
  4. Improved liquidity: MEV activities can increase market liquidity and reduce spreads in decentralized finance protocols, benefiting traders and liquidity providers[3].
  5. Validator rewards: MEV allows validators to earn additional rewards beyond standard block rewards, potentially attracting more participants to secure the network[3].
  6. Transaction fee optimization: Competition among MEV searchers can lead to more efficient gas fee markets, potentially benefiting users in the long run[1].
  7. Innovation driver: The existence of MEV encourages the development of more sophisticated protocols and solutions to mitigate its negative effects, driving innovation in the blockchain space[7].

Analysis​

KPI to understand the impact of MEV.

Individual Transaction MEV:

  • Measure: The value extracted from individual transactions.
  • Intent: It helps in understanding which transactions are most affected and are potentially high-value targets for MEV.

Number of MEV Strategies Employed

  • Measure: The count of different MEV strategies like Sandwich Attack, Arbitrage, Sniping, and Liquidation being used.
  • Intent: It helps in identifying the most prevalent strategies and focusing on mitigating them.

Gas Fees

  • Measure: The amount of gas fees paid for transactions.
  • Intent: High gas fees are indicative of potential MEV activities as bots are willing to pay higher fees to prioritize their transactions.

Transaction Confirmation Duration

  • Measure: The time taken for a transaction to be added to a block and finalized.
  • Intent: It sets the upper bound on the time value of a transaction's information and is crucial for bots performing MEV.

Network Latency

  • Measure: The delay in the propagation of transactions and blocks across the network.
  • Intent: Lower latency provides a competitive advantage to bots, and monitoring it can help in identifying abnormal activities.

Number of Bots

  • Measure: The count of bots active in the network performing MEV.
  • Intent: It helps in assessing the level of competition and the prevalence of MEV activities in the network.

Profitability Analysis

  • Measure: The profit made by bots after considering gas costs and other expenses.
  • Intent: understand the economic incentives behind MEV and assessing the sustainability of such activities.

Sequence of Transaction Confirmation

  • Measure: The order in which transactions are confirmed in a block.
  • Intent: Monitoring the sequence can help in identifying front-running and other MEV strategies.

Transaction Queue (Mempool) Analysis

  • Measure: The state and composition of the transaction queue.
  • Intent: It provides insights into pending transactions and potential targets for MEV.

Frequency of Strategy Use

  • Measure: How often specific MEV strategies are being used.
  • Intent: Identify the frequency of strategies helps in understanding the prevalent methods and focusing on countermeasures.

Volume of Sandwich Attacks, Arbitrage, Sniping, and Liquidation

  • Measure: The volume and value associated with each MEV strategy.
  • Intent: Quantify the impact of each strategy on users and the network.

Solutions​

How to mitigate risk exposure.

Develop protocols and mechanisms that ensure transparency and fairness can mitigate the impact of MEV.