What is MEV? Maximal Extractable Value on Ethereum

Front-running involves getting a transaction first in line in the execution queue ahead of a known pending transaction. On Ethereum, searchers run specialized front-running bots that scan the network for large orders on decentralized exchanges and submit cyberghost vs expressvpn competing transactions with higher gas fees to get them mined before the victim’s transaction. Finally, central to the MEV game were the searchers or the bot operators who sought to identify MEV opportunities and capture them in different ways. Making, buy and sell transactions of the same asset at the same time and profiting from a difference in prices.

This is front-running, one common type of MEV strategy generally considered malicious. Front-running is profitable because the attacker receives tokens at the price you wanted to buy, and also benefits from the price impact of your trade. From the mempool, miners (in Proof-of-Work systems), validators (in Proof-of-Stake systems), or builders (i.e., MEV opportunity searchers) select transactions to include in the next block, typically favoring those with higher fees. Once a set of transactions is included in a block and that block is mined, the block is broadcasted to other nodes in the network to be validated and will continue to be built on top of.

MEV: How it Worked on Proof-of-Work Ethereum

1. The searcher identifies a transaction that will raise or lower the price of an asset.
2. As a leveraged position on a DEX approaches its liquidation point, MEV-hunters will race to squeeze the position to liquidation in order to skim a portion of the liquidation fees.
3. In this scenario, a drop of ETH to $1,240 would liquidate their loan because the $10,000 loan would be equal to 80.5% of the $12,400 of collateral.
4. For users who aren’t utilizing any other MEV protection tools, setting a lower slippage tolerance can be a good first line of defense, however it’s by no means a complete solution.
5. This fast response keeps the protocol solvent, even in volatile market conditions or when the network is congested, as MEV actors are willing ro pay high fees to execute the liquidation as a priority.

These blocks would, by default, be less profitable for block builders and validators from an MEV point of view, potentially leading the latter to censor them or not embed them in the blockchain. Rather than programming complex algorithms to detect profitable MEV opportunities, some searchers run generalized frontrunners. Generalized frontrunners are bots that watch the mempool to detect profitable transactions. The frontrunner will copy the potentially profitable transaction’s code, replace addresses with the frontrunner’s address, and run the transaction locally to double-check that the modified transaction results in a profit to the frontrunner’s address. If the transaction is indeed profitable, the frontrunner will submit the modified transaction with the replaced address and a higher gas price, “frontrunning” the original transaction and getting the original searcher’s MEV.

An introduction to maximal extractable value on Ethereum (PDF)

Data shared by Flashbots estimates earnings from MEV in Ethereum, which is where most MEV occurs, to be close to $1 billion and growing. By doing this, the attacker is able to extract value from Alice’s and Bob’s transactions, essentially “sandwiching” their own transactions between the two. The Builder API is a modified version of the Engine API(opens in a new tab) used by consensus layer clients to request execution payloads from execution layer clients. As outlined in the honest validator specification(opens in a new tab), validators selected for block proposing duties request a transaction bundle from a connected execution client, which they include in the proposed Beacon Chain block.

Under Proof-of-Work, users were the most exploited party in this game as they emitted some amount of value that miners and non-miner MEV extractors could capture without giving anything back. Before Ethereum transitioned from Proof-of-Work to Proof-of-Stake (an event now known as the “Merge” in the crypto space), miners were responsible for selecting and aggregating transactions into blocks. Crucially, they had complete autonomy in deciding which transactions from the mempool—an off-chain space where pending transactions await confirmation—they’d include in the blocks they mined.

Additional Resources​

Frontrunning is a particular type of MEV that affects all forms of Ethereum transactions including trades, NFT mints, and more. Users can sometimes receive messages like “your transaction may be frontrun” on decentralized exchanges and it’s important to understand what this means. On the other hand, MEV enables frontrunning and unfair practices that could lead to substantial losses for uninformed traders. Additionally, excessive MEV extraction might lead to reduced transactional privacy and vulnerability to manipulative behaviors. Understanding these risks and benefits is crucial for traders and investors seeking to navigate the crypto market landscape wisely.

Proposer/Builder Separation (PBS) and the current state of MEV

DeFi lending platforms rely on MEV to liquidate any borrower whose collateral ratio falls below a certain threshold. Liquidating these positions is essential for network health, ensuring that lenders get repaid, and MEV provides financial incentive for bot operators to monitor and execute these liquidations quickly. This fast response keeps the protocol solvent, even in volatile market conditions or when the network is congested, as MEV actors are willing ro pay high fees to execute the liquidation as a priority.

Sign up for free online courses covering the most important core topics in the crypto universe and earn your on-chain certificate – demonstrating your new knowledge of major Web3 topics. “After first building our own infrastructure, we appreciate that mempool management is a difficult, expensive problem to solve at scale. That’s why we partner with Blocknative to power the transaction notifications in our next-generation wallet.” For builders working with Layer 2 (L2) solutions, one challenge has consistently slowed development.. Validators can earn more by connecting MEV-Boost to the Blocknative Relay endpoint. In this scenario, a drop of ETH to $1,240 would the tax treatment of cryptocurrency liquidate their loan because the $10,000 loan would be equal to 80.5% of the $12,400 of collateral. This “over-collateralization” of loans provides a safety cushion for lenders in the event of extremely rapid price fluctuations.

The official Scourge diagram makes it clear that the most important development for the future of MEV will be the completion of in-protocol Proposer/Builder Separation (PBS). It also introduces new potential considerations for how network actors will complete MEV on-chain in the future and what features this will unlock. Opportunities for distributed block builders, pre-confirmations, and in-protocol frontrunning protection are all exciting potential goals. While arbitrage is considered neutral MEV by default, if there are arbitrage opportunities only made possible by how to make a bitcoin paper wallet front-running, it is considered malicious to the end-user whose transaction created the MEV opportunity. The MEV searcher will reorder transactions on a certain liquidity pair before backrunning and/or censoring the target until after their backrun. This creates an arbitrage opportunity that is artificially created before being exploited.