Intro

Defining the Concept of Miner Extractable Value

MEV Strategies

Rising Popularity of MEV

Conclusion

Intro

The cryptocurrency market is skyrocketing and the ascending market cap curve goes up unstoppably — the capitalization index has exceeded the $2 trillion threshold. Only since the beginning of the year, this figure has grown by 180%. No less impressive results are shown by the decentralized finance (DeFi) segment. Its TVL is $181 billion, up more than 500% year-to-date.The popularity of smart contract applications opens up additional revenue loopholes based on market inefficiencies, architecture specifics of Ethereum and other blockchain systems, and DeFi’s widespread automated market maker mechanism with its inherent slippage and intermittent losses. One such loophole is Miner Extractable Value (MEV), to your knowledge. Factually, this is the bare profit that a cryptocurrency miner can make by adding, excluding, or reshuffling transactions in accordance to personal preferences in the blocks of a smart contract. With this in mind, the given analytical blog article illuminates the quintessence of what is MEV (or, to be more precise, what is Miner Extractable Value in its essence and its pluses and minuses), the reasons of its notoriously famous hype among virtual currency miners in the Binance Smart Chain and Ethereum blockchain networks and its negative effects on the blockchain ecosystem.

Defining the Conceptuality of Miner Extractable Value

With the crazy upward moving trend of DeFi projects and non-fungible tokens, MEV has turned in to a relatively new risk for users. This concerns not only high fees for users who pay the so-called invisible tax, but also about the sabotage of consensus by miners competing for additional profit. Many projects are building various tools to neutralize the harmful effects associated with MEV, including the completion of virtual currency transactions at a more or less suboptimal conversion rate. The development of second-layer scaling solutions and the launch of ETH 2.0 with a completely different consensus mechanism can effectively counter MEV.

Cryptocurrency miners are constantly adding transactions into sequentially linked blocks. Although blockchains guarantee the absence of double spending, it is not at all salient that these TXs will be located in the block position itself in the same order. Therefore, virtual currency miners are competent to earn additional profits by utilizing the chance to arbitrarily amalgamate the consecutive order of TXs. This core feature awards the possibility to gain the Miner Extractable Value.

Prior to being added in to an Ethereum block and verified on the network, the altcoin TX is accredited to a widely susceptible mempool. In the layman’s terms. It is a gigantic set of TXs pending for network confirmation. In this mempool, MEV specially programmed bots are looking for lucrative possibilities to generate some income, for example, from arbitrage transactions or alternatively from the liquidation of undersecured loans.

MEV Strategies

It is not rocket science: there exists a cornucopia of active and functional MEV strategies thus far. Each and every demand a clear ordering of TXs: for instance, their placement before and / or instantaneously after executing bulk orders on unregulated virtual currency exchanges. An arbitrage possibility appears regularly each time the cost of a virtual currency differs on different platforms. The fundamentals for such differences may be triggered by insufficient liquidity of coins and impressive sizes of TRs that affect their capitalization in the not so distant perspective. Arbitrageurs buy virtual currency on the site where it is cheaper and put it up for sale where it is hyperbolically expensive. Such TXs contribute to the kickback of coin or token values to the equilibrium state. Similar transactions are possible, including those taking place in-between DEX and regulated platforms. The main types of MEW strategies are outlined right here:

–          Frontrunning;

–          Screening;

–          Sandwich;

–          Uncle bandit.

First and foremost, frontrunning is the mechanism of introducing a new TR into the working line in the nick of time before the kernel TR. For instance, a trader makes a high volume deal with ether on some DEX. The operation is gigantic in its volume and it is capable of boosting the total cost of the Ethereum altcoin in the coinmarketcap statistics page. By identifying the corresponding TR in the middle of its progression in the mempool archive, the automated and programmed script is eligible to make a reasonable profit: make a purchase of Ethereum at an insignificant price just before they get their hands on a big volume of ETH, having the prime aim to subsequently sell the virtual currency at a costly price after its growth.

Screening. The programmed software initiates TR 1 to the blockchain at a lower gas cost by contrast with the TR2, which is in progress at the moment. Thus, TR 1 finishes right after TR 2 within the identical block. Case in point, with regard to liquidation strategies, bots place TXs in sync with the price oracle when it is updated to stay ahead of the competition. Or an order to sell an asset is performed without any delay following a sharp price spike of a coin triggered by a previous large purchase.

Sandwich is a symbiosis of the previously mentioned frontrunning and progressive back screening. In this type of scenario, a lumpy order for buying is detected in the smart mempool, and stemming from this, the robotized software submits its front-running order prior to it with an aim of buying virtual currencies at a much lower cost.

Uncle bandit. This is a more or less advanced type of attacking: the robotized software implements a “sandwich operation” with reliance on the data located in the uncle block. The latter, in fact, serves as a storage point. The core benefit of miners over the remaining part of the market players is obvious, conditioned that it is they who can detect the so-called uncle (neither a cousin or nephew) blocks in the first place.

Drawing a parallel with the conventional marketplace, it is worth considering that similarly arbitrage and frontrunning are by no means new phenomena in these scenarios. Backscreening in conventional and trifle markets is usually associated with mechanisms that allow trading firms to fulfill orders momentarily right after certain events. Dark pools are also in existence when it concerns conventional marketplaces. By and large, we can assign the title of closed platforms for trading assets that are not available to ordinary investors. Buyers and sellers on such platforms are able to submit orders without disclosing sensitive data about them to the wide audience. Since not only miners but also other market players participate in such operations, MEV is being grossly deciphered as the Maximum Extractable Value In this context.

Rising Popularity of MEV

With reference to the MEV-Explore service sites, for over two years, market participants have extracted over $1 billion worth of MEV (that is impressive!). The explosive nature in MEV mining, also known as the “invisible tax”, has caused multiple virtual currency miners to launch their own robotized software. In March 2021, the large Ethereum pool Ethermine from the Austrian company BitFly implemented an MEV arbitrage strategy the prime aim of which was to compensate for the loss of virtual currency miners’ income followed by the activation of the London hard fork. 80% of the earned profits were distributed among the pool participants. The top MEV transactions with the ATH indices (excluding the not so significant figures):

–          Liquidation ($3,264,587.08);

–          Arbitrage ($2,848,770.92);

–          Liquidation ($2,202,264.97).

Independent analysts note that as early as April 2021, up to 30% of blocks in Ethereum contained transactions related to MEV strategies. Probably, by now, a significant part of the top 10 mining pools and large solo miners use one or another MEV solution, for instance, the most popular MEV-Geth flash programmed software. As the popularity of blockchain based technologies is on the considerable crest of hype, arbitrage possibilities expand and useful instruments for conducting related TXs develop.

The destructive nature of MEV can be evaluated from both perspectives, positive and negative. A lot of researchers, developers, experts and analysts believe that the very phenomenon of MEV is poisonous and toxic for the users in the blockchain ecosystem. However, every cloud has its silver lining and everyone can gain maximum profit when the golden opportunity is on the horizon. By simply resorting and mixing the virtual currency transactions in the mem pool one can absorb a great deal of useful information and afterwards, make big things happen in the crypto universe. This all is limited to a person’s imagination and creativity, whereas the digital universe grants an awesome access to the digital transformation and flexible technologies.

When the best and market oriented prices are located, the protocol itself performs the orders for buying or selling tokens in batches. At a first glance, it looks for CoWs trading orders: if there exists a perfect match, a smaller trade is being fulfilled to a larger order accordingly. GPv2 then searches for the most preferable liquidity on other DEXs to complete the remaining order executions.

A negative effect of frontrunning is the completion of trading at a sub-optimal conversion ratio. Over time, more complex miner-intensive transaction reordering strategies may proliferate. Currently, alternative DeFi ecosystems are actively developing: Binance Smart Chain, Solana, Polygon, Terra. A natural question arises: are they perfectly suitable for MEV, or are such operations peculiar only to the Ethereum ecosystem?

Many projects are doing their best to lessen the impact of MEV. The one that is undeniably worth mentioning is Flashbots. The firm’s personnel have developed tools to circulate MEV and address data inconsistencies in the ledger. Besides, they are actively developing the Flashbot Alpha solution, which implements a closed bidding bid mechanism to prioritize TXs. In fact, it is an upgraded Ethereum format of Geth.

Conclusion

The meteoric upward trend of the DeFi segment is not purely associated with hacker attacks and fraudulent schemes. One should keep in mind that a more or less new risk for clients of unregulated platforms is MEV (now you know what is MEV, its major differentiating factors, its impact, both negative and positive, etc.). A kaleidoscope of innovative solutions are being built and transformed to counter the MEV phenomenon.

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