Uncover the mystery of the benefits of the Ethereum MEV industry chain

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Introduction to MEVs

MEV is used to describe the act of reordering transactions to maximize profit (i.e. "maximum extraction benefit") when generating a new block (to be added to a blockchain). It can also be understood as the extra value squeezed out of a block beyond standard rewards and gas fees by choosing which transactions to add in which order.

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Fundamentals of MEVs

Block producers (commonly known as "miners") play a key role in securing and maintaining the blockchain network by validating transactions and adding them to the network in blocks. Which transactions are added to a block is up to the block producer. In a perfectly fair economy, transactions should be processed in a "first come, first served" chronological order.

However, the incentive mechanism of the blockchain makes block producers choose transactions based on profitability, which means that those transactions with high transaction fees will be selected first, which is why users will pay higher gas during busy hours reason for the fee. If block producers choose transactions with higher transaction fees, they will make more profits. As a result, transactions with lower transaction fees take longer to be added to a block.

Miners are responsible for packaging user transactions into blocks, and can also determine the order of transactions. This allows them to gain additional profits from the market in some cases by rearranging trades, inserting their own trades, or delaying other trades.

For example, suppose someone initiates a large transaction to a decentralized exchange (DEX), which may cause a change in the price of a certain token on the exchange. A miner can insert his own transaction ahead of this large transaction, buy the token that is about to rise in advance, and then sell the token immediately after the large transaction is completed, profiting from it. This phenomenon is very similar to being caught between two pieces of bread, so it is called "sandwich attack" for some reason.

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Form of MEV

Of course, MEV is not equivalent to a "sandwich" attack, and "sandwich attack" is just a type of MEV. At present, MEV mainly has several main forms such as front-running trading, arbitrage trading, and loan liquidation.

Front-running deals:MEV Seekers and Block Producers can take advantage of its ability to order transactions in blocks. For example, preemptively trade an important buy order that is still waiting to be executed in the trading pool, or participate in the whitelist of some NFTs first. MEV is generated when a similar buy order is inserted before that trade to get a more favorable price before the larger buy order goes through.

Arbitrage trade:Arbitrage opportunities arise when the price of an asset is inconsistent across trading platforms. In the cryptocurrency space, the same token may be priced differently on two different DEXs. Arbitrageurs take advantage of pricing differences to trade to profit. MEV is generated when the Seeker's bot identifies a pending transaction and inserts its own transaction ahead of it to extract the value provided by that arbitrage opportunity.

Clearing transactions:DeFi allows users to take out loans with deposited digital assets as collateral. If the market fluctuates and the value of the collateral falls below a certain price, the position will be liquidated. The smart contracts involved typically pay rewards or fees to transactions that trigger liquidation. When any searcher or block producer running a bot discovers such a transaction, they can get rewarded by inserting their own liquidation transaction in the block before everyone else.

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Types of MEVs

From the perspective of type, MEV can also be divided into the following categories:

Sovereign MEVs:The blockchain community can try to control its own MEV through sovereign MEV, that is, set the protocol rules for extracting MEV, allow or disallow certain strategies for MEV extraction, and specify which links may obtain MEV benefits. Sovereign MEVs allow the protocol community to decide on priorities and how MEVs are generated. For example, for some blockchains with sovereign MEV rules, violating validators may face corresponding penalties.

Internal MEVs:Internal MEV refers to MEV generated directly on the application-specific blockchain. This form of MEV allows application developers to set rules that properly capture MEV methods. For example, an arbitrage trading strategy can be used where a buy order is placed on one trading platform while a sell order of the same amount is placed on another trading platform.

CeFi-DeFi MEV：Arbitrage by taking advantage of order price differences between centralized exchanges and DeFi applications. Crypto asset prices on centralized exchanges tend to update ahead of the relocation of on-chain trading pools and DEX liquidity providers. Due to the frequent activity of arbitrage traders, CeFi-DeFi MEV is one of the largest generation sources of MEV.

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Pros and Cons of MEVs

Whether MEV is good or bad depends on whose standpoint you look at this issue. From an objective point of view, MEV is beneficial to the long-term security and price accuracy of the blockchain, but it is not good for end users.

On the one hand, MEV incentivizes economic coherence. By constantly monitoring prices, arbitrage bots tighten price spreads and minimize variance, ultimately providing more accurate and consistent prices. In addition, higher network fees also provide higher security guarantees. Given the potential for more profits, more robots participate in the calculation process, making the network more decentralized. This also further urges block producers to maintain online mining or verify nodes to increase participation, thereby improving network security.

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MEV Trends and Various Ways to Respond

Ethereum founder Vitalik Buterin admitted that MEV will always exist in Ethereum. Validators can always prioritize transactions with higher fees, even if those transactions are clearly from "front-running" or "sandwich attacks". MEV traders will try to use arbitrage and other technical variations to maximize profits.

On the bright side, MEV can also be intervened, for example, developers can add relevant rules through the sovereign MEV mentioned above to determine who can get rewards and how to withdraw MEV from the blockchain.

Ebunker partner 0x Todd said that from a technical point of view, because Ethereum is a distributed network, it will never be possible to confirm what is absolutely fair and "first come, first served". Therefore, it is technically impossible to "cure malicious MEV" of. However, ETH can alleviate MEV’s exploitation of certain users from a mechanism. For example, the PBS to be updated by Ethereum advocates the separation of roles between block producers and packagers. The introduction of more roles will significantly increase the privacy of user transactions, thereby reducing the impact of sandwich attacks on users.

Here are some countermeasures against MEV arbitrage in the market:

The developer "Codeforcer" proposed a method to use the smart contracts of Salmonella and Uniswap pools to combat "sandwich attacks". The smart contract uses a "Poisoned" token that would drain assets used for the attack if a "sandwich attacker" targeted smart contract transactions. CodeForcer once used this strategy to drain the attacker's more than 100 ETH (but the current arbitrage bots on the market have been upgraded and adapted to this strategy).

According to statistics from an organization called "MEV Blocker", the value of DEX users acquired by validators using "front running" is as high as $1.3 billion. MEV Blocker users can add RPC endpoints to their Ethereum wallets to avoid "front running" and "sandwich attacks".

Also trying to solve the front-running bot problem is FlashBots' "MEV Protection". As the largest MEV protocol on Ethereum, it also provides a free private RPC service, allowing users to submit transactions directly to validators, making their transactions invisible in MEMPOOL. Theoretically, if the transaction is not visible, then the bot cannot perform "front running" or "sandwich attack".

The non-custodial wallet Blockwallet also integrates a feature called "FlashBots Protection".

Ethereum Research proposes a MEV Smoothing method that will make the MEV income of validators more uniform. This method shows that the committee can confirm new blocks of transactions and distribute the rewards evenly.

Additionally, Chainlink’s FSS (Fair Sequencing Service) has also proposed a solution to the MEV problem. First, FSS aggregates transactions into blocks and arranges them in chronological order. It then encrypts the data on-chain to protect it from being shown to miners or block producers ahead of time (it is not visible until the transaction is packaged). According to the description in Section 5 of Chainlink 2.0, FSS attempts to ensure the fairness of this activity through smart contracts that use this function (rather than individual nodes).

In the long run, with the development of technology, more and more people realize the scope of influence of MEV on larger industries and propose more coping strategies, and the "arbitrage opportunities" of MEV may gradually decrease.

Ebunker official website: https://www.ebunker.io