MEV
MEV
The rapid development of the DeFi sector in crypto finance has brought great opportunities for users to manage their assets. But along with this, new risks arose. One such risk was MEV. This arbitrage strategy allows miners to change the order of transactions in the generated blocks and earn on user transactions. This entails higher fees and network congestion and generally destabilizes the blockchain. And although almost all blockchains are subject to MEV, Ethereum bears the main risks, as it is the most common DeFi protocols using smart contracts.
What is MEV
The architectural features of Ethereum and other blockchains using smart contracts allow you to receive additional income using these same smart contracts and DeFi protocols. Previously, MEV was deciphered as a Miner Extractable Value. Still, after the start of using arbitrage strategies, the decoding of Maximum Extractable Value has been more common recently. MEV is the profit that a miner or validator can make by intentionally changing the order of transactions in a block that is added to the blockchain.
How MEV works
Technically, all transactions of users and traders fall into the mempool. Miners take trades from the mempool, form blocks, and add them to the blockchain. Transactions in the league are not arranged in chronological order but in the order in which the miner added them. Here there are conditions under which the miner, having determined the high-margin transaction of the user or trader, can copy it and paste it into the block so that it is executed first. If the miner did not take advantage of this opportunity, trading bots would come into play. They track a highly profitable transaction, copy, and offer the miner a higher commission for executing the trade in the first place. Since there are a lot of trading bots, an auction begins where the transaction fee rises rapidly.
What are the risks of MEV?
For users, the risk is a possible exchange at a deliberately unfavorable rate and an unreasonable increase in gas fees. MEV is also one of Ethereum's biggest issues, with more than $689 million extracted from users of the network year-to-date. By leveraging their discretionary power to sequence transactions within blocks, miners can extract value from decentralized application users on Ethereum, greatly diminishing the user experience and threatening the stability of the network. Moreover, MEV can have deleterious effects between blocks. If the MEV available in a block significantly exceeds the standard block reward, miners may be incentivized to remine blocks and capture the MEV for themselves, causing blockchain re-organization and consensus instability.
How to fight MEV
Unfortunately, a complete solution does not yet exist. However, the developers see the MEV problem and are working on a solution. At the moment, there are two main approaches to solving the problem. The first one is to create tools that increase the transparency of transactions and provide access to MEV to all users. Theoretically, this should increase competition and minimize the negative impact of MEVs. The second approach assumes that the MEV problem is solvable - it is only necessary to update the rules of the Ethereum network consensus algorithm, release protocols that minimize the opportunities for MEV, and, most importantly, increase the motivation of miners to abandon these strategies.
So far, the crypto community cannot eliminate the opportunities for MEV strategies. But their negative consequences can be significantly minimized. The main thing is that the developers and users of the Ethereum network see the problem and are already taking measures to solve it.
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