What is Maximal Extractable Value (MEV)?

Maximal Extractable Value (MEV) exploits information latency and system inefficiencies on blockchains to maximize profits for entities who front-run or back-run high-value transactions.

Nov 08, 2024 at 10:38 pm

What is Maximal Extractable Value (MEV)?

1. Definition:
Maximal Extractable Value (MEV) refers to the maximum profit an entity can extract from a blockchain transaction by exploiting information latency or other system inefficiencies.

2. How MEV Works:

• Transactions on blockchains are typically processed in blocks by miners.
• Miners can prioritize and reorder transactions to maximize their rewards by including transactions with high fees or manipulating network parameters.
• Arbitrageurs and other entities exploit this by front-running (executing a transaction before others) or back-running (executing after others) high-value transactions to extract a profit.

3. Types of MEV:

• Sandwich Attacks: Two transactions are executed before and after a large trade, manipulating the asset's price and profiting from the difference.
• Liquidation Front-Running: Exploiting the delay in transaction confirmation to execute a liquidation before a margin call, allowing the attacker to buy the liquidated asset at a discount.
• Royalty Attacks: Miners withhold legitimate blocks containing transactions that mine NFTs, preventing creators from collecting royalties on their sales.

4. Impact of MEV:

• Fairness Concerns: MEV can favor high-paying users, potentially leading to unfair competition among market participants.
• Blockchain Congestion: MEV can incentivize the submission of high-fee transactions, increasing network congestion and transaction costs.
• Security Risk: MEV exploits can reveal information about users' strategies and positions, potentially exposing them to malicious actors.

5. Mitigation Strategies:

• Batch and Subsidized Transactions: Executing transactions in batches or subsidizing fees to reduce the economic incentive for MEV.
• Limit Orders and Auctions: Using limit orders to restrict price manipulation and auctions to promote fair competition.
• Customized Miner Mechanisms: Altering mining algorithms to reduce the opportunities for MEV extraction.