Understanding Miner Extractable Value (MEV) in one article

Today, the value of the blockchain economy has surpassed $1 trillion and continues to grow at an astonishing rate. Since the beginning of the year, the value of the DeFi ecosystem alone has doubled. However, the widespread application of smart contracts has also created new security vulnerabilities, causing users to lose value if they are not careful. Miner Extractable Value (MEV) is a typical example of this. Blockchain miners can adjust the order of transactions at will, adding or removing transactions in the block, thereby extracting user value. In short, miners have the power to determine the order in which transactions are processed on the blockchain, and will abuse this power for their own gain.

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Blockchain networks like Bitcoin and Ethereum are immutable ledgers secured by a decentralized network of computers (also known as "miners"). These miners are responsible for periodically aggregating pending transactions into blocks, which are then verified by the global network and finally added to the global ledger. The blockchain network can verify all transactions, eliminate the "double spend" problem, and continuously generate transaction blocks to avoid network "downtime", but it cannot guarantee that transactions will be sorted in the order they were submitted to the blockchain.

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Although the common saying is that "miners can extract value", in fact most MEV activities are initiated by third-party robots, not miners. These bots manipulate the ordering of transactions in blocks by raising transaction fees paid to miners. This means that even if miners only sort transactions by gas price, there will be MEV problems. However, MEV can also be thought of as a cap on the maximum value a miner can extract, since miners are the ones who ultimately determine the order of transactions in a block.

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With the application of DeFi and the increasing liquidity of decentralized exchanges, such arbitrage opportunities continue to emerge, and the profit margins behind them are also increasing. Therefore, the competition among arbitrage robots has gradually become fierce. These bots have launched a "price war," constantly increasing the transaction fees paid to miners so that their own transactions can grab the first place. They do this knowing that miners are economically incentivized to queue transactions with the highest gas fees first. While this form of MEV can keep prices consistent across exchanges, it also has a problem.

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For example, once a bot finds a large transaction, it can copy it and pay a higher transaction fee to rank its own transaction at the top. This will change the market price of the trading asset, causing serious slippage in user transactions (note: slippage refers to the deviation between the expected price and the actual price of the transaction). After the user's transaction is processed, the market price of the transaction asset will be further pushed up, which will give the front-runner more room for profit, and sell the asset to obtain greater profits.

This has resulted in users not being able to obtain the optimal exchange rate during transactions, and has generated "hidden fees", which have pushed up the transaction costs of decentralized exchanges, and the actual number of tokens received by users is also less than expected. Like the arbitrage robot, the front-running robot will rank its own transactions at the top by initiating a gas fee price war to make a profit. And this drives up the overall transaction cost in the blockchain network.

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Chainlink's fair ordering service decentralizes transaction ordering to ensure that smart contracts process transactions in a fair and verifiable manner, eliminating any unfair ordering. The fair ordering service can not only avoid unfair transaction ordering, but also prevent the occurrence of gas price wars as much as possible, thereby reducing the gas fee in the network. This way, the transaction fees paid by users will not affect the final ordering of their transactions. It is also worth mentioning that the Chainlink fair ordering service does not require any modification to the underlying blockchain where the smart contract resides.

Chainlink's fair ordering service can support users to submit and order transactions in different ways. Users can submit transactions directly to the off-chain oracle network, or directly to the blockchain transaction pool. The proposal submitted to the transaction pool means that Chainlink's fair ordering service is fully compatible with existing user wallets and blockchain architectures.

Chainlink's fair ordering service provides an execution framework for transaction ordering, allowing smart contract developers to process user transactions fairly according to pre-set standards. This solution not only ensures the fairness of transaction ordering, but also reduces network transaction costs and greatly improves the user experience of smart contracts. Therefore, the DeFi ecosystem can fully realize its potential and create a more economically fair world based on algorithms and encryption technologies.

If you are a developer looking to connect smart contracts to off-chain data and infrastructure, please review the Chainlink developer documentation or contact us.