What is MEV?
Explanation of Miner Extractable Value
Last updated
Explanation of Miner Extractable Value
Last updated
Let’s begin with a quick description of MEV:
Traditionally, miners’ value is the reward they get from mining blocks to form the blockchain network. These blocks consist of rows of user transactions which have verified by the miners. Miners select these transactions from a place called the ‘mempool’, where all user transactions are pooled after they are made. Also attached with each transaction is some amount of gas that the user has determined they are willing to pay to the miner for their services.
It has long been accepted that miners would prioritise transactions offering the highest gas, so to maximize their earnings. Apparently, though, it can sometimes be more rational for miners to not follow the rule of highest gas fee in mining blocks.
An example is when miners spot user transactions that are trying to capture arbitrage opportunities and front-run those transactions, capturing (a majority of) the arbitrage profits for themselves instead.
By mining their own transactions, miners give up potential gas they could have earned from servicing users. However, when faced with the choice between a $5 gas reward and $500 arbitrage opportunity, it’s not hard to understand which option a rational miner would pick to maximize their profits.
Here lies the dilemma of MEV. On one hand, miners are simply doing what’s best for themselves without actually breaking any rule of the system. On the other, miners doing what they are not expected to do can be considered as toeing the boundaries of being ethical — especially when it comes at the expense of the rest of the network.
This is pretty self-explanatory and has been broken down above. For a more dramatic version, read Dan and Georgios’ story, which very appropriately nicknames Ethereum as a ‘Dark Forest’ and miners as its ‘apex predators’.
A miner may submit an identical transaction with a higher gas fee than the arbitrage transaction they identified, instead of mining the block themselves. Other miners, knowing this, may bid even higher gas fees to win the arbitrage ($400 gas fee is not so irrational at all if it’s for an arbitrage opportunity of $500!).
This situation can spiral into a bidding war for the rights to the arbitrage transactions (Priority Gas Auction / PGA) and push up gas prices on the overall network. As miners fight their way around arbitrage transactions, the average user may find no miner willing to service their normal transaction with normal gas offer.
A study on 443,000 blocks has found 1) 10,000+ inefficient blocks for the sake of MEV, 2) average of 0.34 ETH of MEV per block, and 3) gas fees making up around 18.7% of MEV, and MEV-associated gas fees contributing to 3.7% of all transaction fees.
Gas income is constrained by capacity, MEV is not. The latter has grown to make up a large part of miners’ revenue today. To put things into perspective, the chart below illustrates the exponential trajectory of extracted MEV over the past year:
Remember that MEV is first triggered by users’ arbitrage transactions. The more often users find their arbitrage profits stolen by miners, the less incentive there will be for users to make arbitrage transactions on that network.
MEV also undermines the value of gas. With no way of ensuring what sort of service they will get from miners, users are left with a huge disadvantage. Left unchecked, the blockchain network will be highly tilted to the miners’ favour. This is clearly against the spirit of decentralisation behind blockchain and cryptocurrencies in the first place.
