The extraction of Miner Extractable Value (MEV) has become a significant topic of discussion in the blockchain community, as it can have both positive and negative effects on the ecosystem. On one hand, MEV can create opportunities for arbitrage and increase efficiency in the system. On the other hand, it can also lead to unfair advantages for certain actors, potentially harming the systems in the long run.
It is important to recognize that there are immediate costs incurred by all actors in the system and that there are risks that will take place in a few years’ time if the ecosystem around MEV extraction goes in certain directions. To ensure a positive future for the ecosystem, it is essential to understand both the good and the bad sides of MEV.
In this post, we will briefly discuss the potential benefits and drawbacks of MEV extraction, and the importance of having high conviction in addressing these issues. We will examine the risks and costs associated with MEV extraction, and how they may impact the ecosystem in the future.
By understanding the complexities of MEV and exploring ways to mitigate its negative effects, we can help create a more sustainable and equitable blockchain ecosystem.
MEV, which initially stood for Miner Extractable Value, is now commonly referred to as Maximal Extractable Value. It refers to any value that can be extracted by controlling the ordering of transactions and selecting which transactions get included in a block. While miners on Ethereum have traditionally focused on ordering transactions by gas price and simply mining them, there are other opportunities for value extraction on-chain based on the state of the blockchain.
For instance, a miner may notice an arbitrage opportunity between two decentralized exchanges that are underpriced by the incoming transactions in the transaction pool. In this scenario, there is a clear incentive for a miner to insert a transaction that takes advantage of this arbitrage opportunity.
However, MEV strategies can be divided into different realms based on the available information. At the lowest level, the focus is solely on the state of the blockchain and its various smart contracts. The aim is to identify any possible ways to redistribute value and maximize gains.
Above this level is the transaction pool, which provides an additional layer of information. By analyzing both the state of the chain and the transaction pool, miners can optimize the ordering of transactions to maximize their revenues.
Finally, third-party ecosystems like centralized exchanges can also be factored into MEV strategies. By comparing the prices of assets on centralized exchanges with those on decentralized exchanges, miners can identify additional opportunities for value extraction.
It’s important to note that MEV encompasses a vast amount of information, and the most successful miners are those who have the highest conviction in their beliefs about the most accurate representation of the world on an immutable blockchain. While MEV extraction can offer significant benefits, there are also immediate costs incurred by all actors in the system and risks that will become apparent in the long run if the ecosystem around MEV extraction is not managed responsibly. Building products Like Xtreamly that enable users to bring back the value captured by good MEV for the benefit of the ecosystem is crucial to ensuring a healthy and sustainable blockchain ecosystem.
The current era of Ethereum is marked by the rise of Miner Extractable Value (MEV), a concept that describes the value that can be extracted from the ability to order and select transactions for inclusion in a block. While most miners are not yet actively seeking to exploit MEV, non-mining traders are increasingly taking advantage of the opportunity.
However, not all MEV can be captured by non-mining traders. Some MEV can only be accessed by miners, who have the authority to arbitrarily order or exclude transactions. As a result, non-mining traders are limited to a smaller subset of “simple” MEV, while “complex” preferences can only be efficiently expressed through PGAs.
Currently, we mostly see simple MEV being realized, with Uniswap arbitrage being a common example. Another type of MEV that is frequently observed in practice is theft from vulnerable smart contracts. For instance, the Dark Forest post by Dan and Co. Details how an arbitrage bot was able to recognize and copy a transaction intended to recover funds from a vulnerable smart contract, replacing the original address with its own and ultimately stealing the funds before the intended transaction could execute.
MEV Market Overview:
The MEV market is a rapidly evolving space within the cryptocurrency ecosystem. The total value of MEV has increased significantly over the past year, with total daily MEV revenue reaching over $300 million in March 2022. This growth has been driven by a variety of factors, including the increasing popularity of decentralized finance (DeFi) protocols and the rise of specialized MEV extraction tools such as flashbots.
Source-: Mevboost.org, Relayscan.io
The next era of MEV will come when Ethereum miners begin actively exploiting MEV.
The MEV landscape on Ethereum is constantly evolving, with new players entering the scene and new opportunities emerging. One key trend to watch is the potential for Ethereum miners to start actively exploiting MEV. While there has been a common belief that miners are altruistic enough to forgo MEV revenue and continue running default node software, recent developments suggest otherwise.
In the past few months, a small but growing number of miners have been observed exploiting MEV themselves, rather than allowing permissionless fee auctions. They are also revenue-sharing with traders and selling access to private memory pools. This marks a significant shift in the MEV ecosystem, as miners begin to see the potential for capturing more efficient and profitable opportunities that were previously overlooked.
As non-mining traders continue to feverishly pursue MEV opportunities, there is a growing realization that miners may be able to access a pot of untapped revenue that non-mining traders cannot. This could lead to the exploration of more exotic forms of MEV and collusion, posing significant risks to Ethereum and its users.
While it may be surprising that it took miners this long to become involved in MEV, it is clear that the dam has now burst, and miners are poised to venture further into this frontier. As such, it is more important than ever to be aware of the potential risks and costs associated with MEV extraction and to start building products that enable users to bring back the value captured by good MEV back to the ecosystem for a positive impact.
MEV is not unique to Ethereum, but rather a characteristic of any blockchain network that relies on transaction ordering or selection by a designated party or group. MEV can arise in any blockchain network that allows for transaction ordering based on incentives or preference. For example, MEV has been observed in other proof-of-work blockchains such as Bitcoin, where miners have the ability to select which transactions they include in their blocks and in what order. Additionally, MEV can exist in proof-of-stake systems where validators have the power to order transactions based on their own interests.
Solana’s financial sector growth attracted MEV activity that degraded user experience due to low gas fees, the absence of a fee market, and sub-optimal transaction propagation protocol causing network outages. Solana’s architectural design is different from Ethereum, requiring a unique approach to MEV infrastructure.
Jito Labs aims to minimize negative externalities, prevent centralization, and distribute MEV rewards in Solana.
Source: Jito MEV Dashboard
Cosmos, with its nascent DeFi ecosystem, is a potential space for experimentation in block space market design and cross-domain MEV. Unlike Ethereum and Solana, Cosmos has been slower to the MEV conversation, possibly due to Tendermint clients using FIFO ordering and a lack of financial activity.
In conclusion, the issue of miner-extractable value (MEV) is a complex one, and it requires a multifaceted approach to bring the captured value back to the ecosystem.MEV extraction, when done properly and ethically, can offer several potential benefits to the cryptocurrency ecosystem. Some of the key benefits of MEV extraction include:
- Improved transaction efficiency: MEV extraction can help optimize transaction execution, reducing wait times and network congestion, which can lead to lower fees and faster confirmations.
- Increased liquidity and price efficiency: By enabling traders to extract value from price discrepancies between different exchanges and order books, MEV extraction can help increase liquidity and improve price efficiency across the cryptocurrency market.
- More accurate price discovery: MEV extraction can help reveal market inefficiencies and mispricings, leading to more accurate price discovery and a more efficient market overall.
- Potential for higher profits: For traders who are able to successfully extract MEV, there is the potential for higher profits than they would otherwise be able to achieve through traditional trading strategies.
- Incentivizes security: MEV extraction can incentivize miners and validators to maintain the security of the network and ensure the integrity of transactions, as MEV can only be extracted from valid transactions.
The ecosystem needs more strategic solutions to reclaim some of the MEV that are currently being captured by miners and other intermediaries and direct it toward more productive uses within the ecosystem. However, Xtreamly as a disruptive stateless account abstraction model that scales Ethereum found this as an opportunity market and works on creative solutions to control and use MEV for good reasons: By brining back the values captured by MEV, we can enhance user experience and simplify the mass adoption.
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