MEV stands for Miner Extractable Value because it defines the profit miners can make by reordering transactions. It’s a misnomer because in practice, it’s not so much miners but rather arbitrage bots that bid up gas fees to change the ordering of transactions to make a profit.
Here are some common examples:
Ex1. Let’s say you submit a transaction to make a profit on a Uniswap arbitrage opportunity with X amount of gas. For Ethereum, all submitted transactions halt in a mempool waiting to be processed. An arbitrage bot scans the mempool, plays out the transaction you want to make, realizes they’d make a profit, then submits the same transaction with X + 1 amount of gas. Their transaction gets priority and gets the profit.
Ex 2. Let’s say you want to buy token A on a DEX. An arbitrage bot sees your pending transaction in the mempool, and submits the same transaction with a bit more gas. They sandwhich their transaction before your transaction, this pushes up the price of token A, and now they sell token A at a profit.
These arbitrage bots congest the network, increase gas costs, and there are arguments for how they can threaten the permissionless and decentralized nature of blockchains.
To quantify the scope of MEV on Ethereum, since the first block of 2020, there have been more than $300M of extracted MEV from 1.3M MEV transactions that spent $4.5M of gas fees (source).
MEV is inherent to Ethereum’s design, but people are working to mitigate some of its negative externalities - one such group is called Flashbots. They’re a research and development org that has released 4 core products:
In layman terms, it’s essentially a scheme to seal transactions via a private communication network so that arbitrage bots can’t get the data required to arbitrage.
How? Ethereum is a mix between an English auction and an all-pay auction, Flashbots Auctions uses a first-price sealed bid auction. The sealed part comes from “searchers” sending bundles of transactions to “relayers” who get them to miners.
As an everyday user, Flashbots Auctions probably sound quite daunting. Luckily, Flashbots Protect is an easy way to interface with Flashbots Auctions. All you have to do is add a URL to Metamask and it will route your transactions through the Flashbots Auctions network.
Flashbots Data: A way to inspect and visualize MEV-related data on Ethereum
Flashbots MEV Boost: Validators can run MEV-Boost to increase their staking rewards, in return, they participate in a marketplace that is meant to promote greater decentralization and fair distribution of MEV rewards.
Remember, Ethereum is built on rational economic incentives, and MEV arbitrage bots are just a natural consequence of that. Luckily for us everyday users, as bots have become more sophisticated, so too have products to compete with them.
screenshot from MEV-Explore
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