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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.
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