Cointime

Download App
iOS & Android

What Is Maximal Extractable Value (MEV)

MEV is a crypto term used to describe the deliberate reordering, inclusion, or exclusion of transactions when producing a new block (to be added to a blockchain) in order to extract as much profit as possible. Think of it as the extra value squeezed out of a block beyond the standard reward and gas fees by choosing which transactions to include, and in which order.

MEV has most often been associated with the Ethereum network due to its significant decentralized finance (DeFi) ecosystem. The more complex the transactions involved in a block are — for example, smart contracts connected with lending, borrowing, or trading — the more opportunities there will be for block producers to make extra profit (extract maximum value) by deciding to include, omit, or reorder certain transactions.

Defining Maximal Extractable Value (MEV)

When this concept was first introduced, it was mostly associated with the Ethereum network, which used a proof-of-work (PoW) consensus mechanism at the time. As such, miners were the ones with the power to reorder, include, or exclude transactions when producing blocks, and could make these choices to squeeze out extra value.

This led to the term Miner Extractable Value being coined to explain the phenomenon of this extraction of as much extra profit as possible. However, in September 2022, Ethereum finalized The Merge, a technical upgrade that switched the network’s consensus mechanism from PoW to proof-of-stake (PoS).

As such, new blocks on the Ethereum network are no longer created by miners but by validators. PoS systems aren’t immune to MEV, however. Blocks are still being created, so whoever chooses which transactions to include, and in what order, can make decisions that will help them to extract as much money from a block as possible. While the old MEV concept still exists, it is now said to stand for Maximal Extractable Value, since it’s no longer exclusive to miners.

How Does It Work?

Understanding how MEV works requires a basic understanding of the role of block producers (be they miners or validators). They play a crucial role in securing and maintaining blockchain networks, and are responsible for verifying transactions and adding them to the network in the form of blocks. Depending on the specific chain, this process is known either as mining or validation.

Simply put, block producers guarantee the integrity of transactions on the network and ensure it continues to function. Without them, no new data can be added to the chain. Block producers are the ones who collect user transaction data and organize them into blocks to be added to the network chain.

The important thing to note is that it’s up to the block producers which transactions to include in their blocks. Logically, transactions are chosen based on profitability, which means those with the highest fees attached to them will be selected first. This is why users pay higher gas fees (or transaction fees) during busy periods — to ensure their transactions are selected first. If a block producer selects the transactions with the highest fees, they will make a bigger profit. Consequently, transactions with lower fees have to wait longer to be included in a block.

However, there is no rule that dictates transactions must be selected or ordered based on fees. When transactions include more complex information (as they do in smart contract-enabled blockchains), block producers can include, exclude, or reorder transactions so as to make extra profit beyond the standard block rewards and fees.

For example, selecting certain transactions over others and ordering them in a particular way may allow for additional profits due to resultant arbitrage opportunities or on-chain liquidation. This is the essence of MEV: the process of selecting and ordering transactions for further financial gain.

MEV searchers

While it seems like MEV is a strategy that solely benefits block producers, a significant amount of MEV is secured by other participants, known as “searchers”. These participants use MEV-specific operations that analyze network data in search of profitable MEV opportunities.

Searchers typically pay extremely high gas fees to block producers to ensure their profitable MEV transactions and strategies are executed. Rationally, depending on the competition for an MEV opportunity, a block producer can receive gas fees of up to 99.99% of a searcher’s potential profit.

Take decentralized exchange (DEX) arbitrage, for example, where searchers have been known to pay more than 90% of their MEV income in gas fees — they do so as it’s the only way to ensure a profitable arbitrage trade is executed ahead of similar trades.

Top Examples of MEV

Arbitrage, front-running, and liquidation all offer opportunities to searchers and block producers seeking to profit through MEV. Below, we take a closer look at these examples to provide a more detailed understanding of what MEV is and how it works.

Arbitrage

When the price of an asset isn’t consistent across exchanges, there is immediately an arbitrage opportunity. In the crypto space, the same token could be priced differently on two different DEXs. When this is spotted by someone (an arbitrageur), they will move to make a trade to profit from the discrepancy. MEV takes place when a searcher’s bot identifies the pending transaction and inserts their own transaction ahead of it in order to extract the value offered by that arbitrage opportunity.

Front-running

Searchers and block producers can take advantage of their ability to order transactions in a block to front-run a significant buy order that’s still pending in the transaction pool. MEV occurs when a similar buy order is inserted ahead of that trade in order to secure a more favorable price before the large buy order goes through, which would increase the price of that digital asset.

A similar MEV strategy is “sandwiching”, which entails placing a buy order before and a sell order after a specific price-moving transaction, thereby taking advantage of the price pressure from both sides.

Liquidations

DeFi allows users to take out loans against deposited digital assets as collateral. If the market moves and the value of the collateral drops below a certain price, that position is liquidated. The smart contracts involved often pay out a reward or fee to the transaction that triggers the liquidation.

An MEV opportunity exists here for any searcher or block producer running bots to spot this kind of transaction, and who are then able to insert their own liquidation transaction in the block ahead of anyone else, thereby extracting the reward value.

Benefits and Drawbacks of MEV

MEV is a rational strategy as those engaging in it are mainly trying to maximize their profits. Some would argue that it benefits the wider ecosystem by ensuring that inefficiencies are corrected as quickly as possible.

For example, MEV searchers racing to be the first to capture value from arbitrage opportunities results in speedy price corrections across DEXs. Similarly, lending protocols don’t want risky loans going unchecked should collateralization levels become unbalanced, so the MEV liquidation push leads to lenders being repaid as soon as possible.

However, MEV also presents a number of issues that mustn’t be ignored. Some implementations, such as front-running and sandwiching, produce bad outcomes for other users, who are forced to overpay on their trades, suffer from greater slippage, or lose out on value in what is essentially a zero-sum game.

Additionally, MEV searcher activity can lead to higher gas prices and network congestion as they compete to insert their transactions into blocks to capture the resulting value.

On a fundamental level, if the value from reordering transactions in a previous block is greater than the rewards and fees of the next block, MEV could make it economically rational for a block producer to commit to blockchain reorganization. This would then threaten the consensus and integrity of the network.

As the ecosystem continues to rapidly evolve, finding solutions to these MEV-related problems is now a core area of research and development within space.

Comments

All Comments

Recommended for you

  • Spot gold continues to fall

    spot gold continues to decline, with the decline expanding to 2%, at $3315.49 per ounce.

  • BTC breaks through $93,500

    the market shows BTC has broken through $93,500, now trading at $93,506.58, with a 24-hour increase of 6.12%. The market is fluctuating greatly, please manage your risks.

  • U.S. strategic Bitcoin reserves may announce details in the coming weeks

    Trump signed an executive order in early March this year proposing to establish a national strategic reserve of Bitcoin and other tokens, and requested the Treasury Secretary to submit an evaluation report on the legality and feasibility of the plan within 60 days. With less than two weeks remaining until the 60-day deadline set by Trump's executive order, this means that more details about the US Bitcoin reserve will soon be disclosed. Market expectations for this may be one of the important catalysts for the recent rebound in cryptocurrency. In addition, any comments questioning the independence of the Federal Reserve have also had a positive spillover effect on Bitcoin.

  • Bitcoin's market share once rose to 64.67%, but now fell back to 64.30%

    On April 23rd, data, the Bitcoin dominance (BTC.D) briefly rose to 64.67% this morning, reaching a new high since February 2021, and is currently back at 64.30%. The high Bitcoin dominance indicates the quietness of the altcoin market, but it may also suggest that a bottom reversal is imminent. Based on historical data, when Bitcoin dominance surged above 60% in November last year, altcoins started a small bull market. In 2019 and 2021, Bitcoin dominance reached highs above 70%, followed by a broad and spectacular uptrend.

  • Spot gold breaks $3,500/ounce for the first time, setting a new record high

    spot gold soared, breaking through the $3500 per ounce integer mark for the first time, rising 2.14% intraday, and rising more than $870 year-to-date. 

  • BTC falls below $88,000

    market shows BTC has fallen below $88,000, now trading at $87,996.01, with a 24-hour increase of 0.68%. The market is fluctuating greatly, please be prepared for risk control.

  • Spot gold hits a new all-time high again, breaking through $3,450/ounce

    spot gold continued yesterday's upward trend, breaking through the $3450/ounce mark for the first time, rising 0.76% during the day, and accumulating over $820 in gains for the year. 

  • Cointime精选 ·

    Are we finally ready for a gas limit increase?

    There has been growing discussion around the possibility of increasing Ethereum’s gas throughput, either by raising the gas limit or reducing slot time. The key argument in favor of this is that the hardware requirements for running a validator have steadily decreased over the past four years.

  • Cointime August 17th News Express

    1.VanEck and 21Shares Solana ETF Form 19b-4 Suspected to be Removed from CBOE Website

  • Ethereum network gas fee falls back below 1 gwei

    According to Etherscan data, the current Ethereum network gas fee has fallen below 1 gwei, currently at 0.937 gwei.