What Is MEV?
The term "maximum extractable value" (MEV) refers to the maximum reward obtained from a single block production. This value is typically greater than the standard reward for block creation, and it’s created by re-ordering the transactions within a specific block while it is being formed. In other words, MEV is the maximum profit a validator, or network participant can make from altering the order of transactions in a blockchain.
MEV previously stood for "miner extractable value" and was unique to the Ethereum blockchain. However, since Ethereum has ported to Proof of Stake (PoS), where validators rather than miners now control the block creation process, and because MEV is also present in other blockchains, such as Solana, the term now stands for "maximal extractable value.”
MEV is both good and bad for the average network participant and validator. For one thing, it contributes to the continued integrity of blockchain networks and provides more opportunities for people to earn rewards. It also has a disadvantage in terms of transaction prioritization. In a later section, we'll get to explore this further.
Participating in MEV
MEV extraction opportunities come in various forms, but some of the most popular are as follows:
Some network participants, otherwise known as searchers, use automated software to monitor a blockchain’s mempool for profitable transactions. If a profitable opportunity is identified, this software will simulate a typical user transaction with a higher gas price, causing validators to prioritize that transaction above others.
- DEX Arbitrage
Another MEV use case is DEX arbitrage trading. Occasionally, cryptocurrency prices fluctuate between exchanges, most likely due to excessive trading demand on one exchange vs. another. When situations like this arise, traders can acquire the tokens at a lower price on one exchange and sell them for a profit at a slightly higher price on another.
- Sandwich Trading
Sandwich trading is another typical MEV use case. In this method, searchers typically monitor a blockchain’s mempool for large upcoming transactions, then create their trade to be influenced by the large transaction trade.
MEV Effects: Benefits and Downsides
On the plus side, MEV opportunities mean more profit for network participants and validators who are fortunate enough to participate. Furthermore, MEV prospects like DEX arbitrage have prompted DeFi projects to strengthen their integrity to ensure that users receive the best and most accurate token values.
There are also some drawbacks — because of competition from participants willing to pay higher rates to speed up their transactions, MEV may prioritize transactions and raise gas fees. This scenario can result in unfair transaction re-ordering, congestion, and higher gas prices for others.
The MEV extraction process is also complex and requires specialized skills, limiting its availability to a small number of individuals.
MEV in ETH 2.0
Ethereum’s transition to PoS has certainly not done away with MEV extraction; validators are likely receiving more rewards from MEV than from conventional network rewards right now.
There has also been some criticism of the MEV methods used in ETH 2.0, particularly MEV Boost. According to some reports, certain validators restrict the types of MEV Boost relays from which blocks can be accepted, specifically refusing to accept blocks from MEV Boost relays that do not comply with Office of Foreign Assets Control (OFAC) regulations. These MEV Boost roadblocks have raised concerns about the Ethereum network's centralization.
At InfStones, we are committed to making MEV's beneficial qualities available to our users while mitigating its adverse effects. For example, we integrated Flashbot into our platform, allowing users hosting Ethereum nodes to participate in MEV opportunities actively. This feature is enabled by default for all Ethereum nodes, does not require any complicated configuration, and allows users to earn up to 50% rewards actively.
MEV refers to the total amount of reward that can be obtained from creating a single block, and as we’ve covered in this article, MEV has both positive and negative aspects. It's crucial that network users are aware of this concept, and one of the ways InfStone ensures this is by implementing a feature that allows for universal participation.
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