What is MEV?

Blockchain is a decentralized and secure system that enables the sharing of data. One of the purposes of blockchain networks, which utilize digital assets like cryptocurrencies, is to facilitate secure and transparent financial transactions. However, a concept called Maximum Extractable Value (MEV) has emerged in the world of blockchain. In this article, we will examine what MEV is and its impact on the blockchain ecosystem.

 

What is MEV?

Maximum Extractable Value (MEV) refers to the financial value that can be obtained from transactions performed on blockchain networks. MEV arises from factors such as the ordering of transactions, interactions between transactions, and the behavior of smart contracts on the blockchain.

Most MEV is extracted by independent network participants called Extractors. They utilize complex algorithms on blockchain data to find profitable MEV opportunities. Subsequently, robots automatically submit these profitable transactions to the network.

Miners receive a portion of the total MEV amount in any case, and extractors agree to pay the gas fee in between. Assuming that extractors are economically rational, the gas fee they are willing to pay can be a certain percentage of their MEV, up to 100%.

However, numerous individuals are seeking to engage in the same profitable arbitrage trading, so for highly competitive MEV opportunities like DEX arbitrage, extractors need to pay miners 90% or more of their total MEV income as gas fees.

 

Sources of MEV

The sources of MEV are diverse and can vary depending on various factors. Factors such as the ordering of transaction blocks and transaction speed affect miners’ ability to obtain MEV. Additionally, elements such as liquidity providers, arbitrage opportunities, and liquidity pools can also be sources of MEV. MEV can play a significant role, especially in high-interaction and complex smart contracts, such as decentralized finance (DeFi) applications.

 

Impacts of MEV

MEV can have significant implications for the blockchain ecosystem. Firstly, MEV can challenge the goal of decentralized financial systems to be fair and transparent. MEV can manipulate processes such as transaction ordering and prioritization, leading to certain participants gaining advantages over others. Furthermore, MEV can contribute to market fluctuations during periods of price instability and low liquidity. When examining MEV from both positive and negative perspectives:

Good: Many DeFi projects rely on different economic actors to ensure the usefulness and continuity of their protocols. For example, DEX arbitrage allows users to obtain the best and most accurate prices for their tokens, and lending protocols rely on quick liquidations when borrowers’ collateralization ratios fall below a certain threshold to ensure payment to lenders.

 

Without rational extractors who investigate and correct economic inefficiencies and take advantage of economic incentives from protocols, DeFi protocols and dApps in general may not have stood on such a solid foundation as they do today.

 

Bad: Generalized frontrunning and gas price auctions lead to network congestion and high gas cost for anyone trying to perform regular transactions on the network. These auctions occur when multiple frontrunners compete by gradually increasing gas prices to be included in the next block.

 

MEV can have harmful effects beyond what happens within blocks. If the MEV contained within a block significantly surpasses the normal block reward, miners can be incentivized to reprocess blocks and capture the MEV for themselves. This can lead to blockchain reorganizations and consensus instability.

 

Efforts to Reduce MEV

The blockchain community is actively working on exploring ways to reduce MEV. Better design of smart contracts and transaction blocks, fair and transparent transaction ordering, can help mitigate the impact of MEV. Additionally, tools and analytical methods are being developed to enhance participants’ ability to detect and evaluate MEV. MEV is not exclusive to Ethereum, and as opportunities become more competitive on Ethereum, extractors are turning their attention to alternative blockchains like Binance Smart Chain, where similar MEV opportunities are available with less competition.

 

Maximum Extractable Value (MEV) is an important concept in the blockchain world, representing the hidden value that can be obtained from financial transactions. MEV has diverse sources and can have various impacts on the blockchain ecosystem. However, the blockchain community is actively working to reduce MEV and create a more fair and transparent system. MEV is a topic that anyone interested in blockchain technology should understand.

 

You can find the source I referenced while writing this article below:

https://ethereum.org/tr/developers/docs/mev/

 

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