What Is MEV In Blockchain And How It Is Exploited?

The blockchain industry continues to evolve, leading to the emergence of distinct technologies and methods such as mining, block verification, yield farming, and staking. Another noteworthy phenomenon within this arena is the Maximal Extractable Value (MEV).

This approach is widely acknowledged for its ability to substantially improve financial yields for those involved in mining activities, verification processes, and other related areas.

About MEV

MEV represents potential profits miners and validators can achieve by selecting which transactions to include or exclude from a block. Essentially, MEV empowers miners to boost their earnings by intentionally ordering transactions in their favour.

This phenomenon arises from actions like rearranging transactions, censoring specific ones, and influencing network consensus mechanisms. It is crucial to recognise that MEV extends beyond blockchain networks, manifesting in traditional financial systems as well.

The Significance of MEV

MEV influences the blockchain landscape, impacting its security, decentralisation, and fairness. The capability of influencing transactions for personal benefit contradicts the fundamental tenets of decentralisation and trustlessness.

Furthermore, MEV can foster increased centralisation as miners with greater computational power stand a better chance of mining blocks successfully, thereby accruing more profits. Such a scenario could pave the way for monopolistic practices in the blockchain sphere, undermining the ethos of inclusive participation.

MEV’s Influence on Blockchain

MEV has given rise to various malicious techniques and strategies that exploit its potential:

• Crypto Sandwich Attacks are highly manipulative tactics employed by MEV seekers to profit from price fluctuations. These attackers create artificial price movements by purchasing at one market and selling at another, resulting in losses for other market participants.

• Front-Running involves using automatic bots to identify and capitalise on profitable transfer opportunities. This practice has sparked ethical debates as it can potentially harm regular traders by placing them at a disadvantage.

• DeFi liquidation is yet another method that MEV seekers utilise to extract value from decentralised networks. By independently liquidating collateral, these actors generate profits without impacting other users.

Solutions to MEV

Despite being legal in DEXs, MEV techniques result in network congestion, high gas rates, and efficiency problems. The sector is currently exploring policies to mitigate these challenges and promote balanced market transactions.

One such approach is implementing a fair ordering mechanism that prevents miners from manipulating transaction orders for personal gain. Additionally, measures like ’miner bribing’ have been suggested, where honest miners are incentivised to include specific records in their blocks by offering them higher rewards.