11th May 2021
Origin and Necessity of MEV
MEV (Miner Extractable Value) refers to the opportunity for a miner to increase their earnings by changing the order of transactions in a block. The name “miner” extractable value is a tad misleading because it’s not necessarily miners who extract this value. Many arbitrage bots are engaged in similar transactions in the network and submit identical transactions. The transactions willing to pay more fees will be included by miners. This process is called a Priority Gas Auction (PGA). With the increasing use of DeFi, the arbitrage activities of PGA bots increase rapidly.
MEV is mostly extractable from many liquid protocols. Uniswap and Sushiswap combined have accounted for almost 70% of all MEV extracted.
Flash Boys’ paper provides a direction for solving the problems facing MEV:
- Making MEV information transparent through MEV-Inspect, a tool to visualize and quantify the amount of MEV floating around Ethereum in real-time.
- Making access to value extracting opportunities more accessible through MEVGETH, a custom implementation of Go Ethereum that creates a market for arbitrageurs to submit bids to miners directly.
- Distributing the rewards of MEV to the broader community (no product yet).
With the use of Flash Boys since 2021, the gas fee of Ethereum has been declining, and the proportion of MEV has also seen a continuous drop.
However, for Flashbots, the first two goals are easy to accomplish, but the third goal, which is to distribute MEV rewards to the Ethereum community, will be a massive challenge because it requires arbitrageurs to give a piece of their profits to the community.
There are two dominant schools of thought regarding the MEV debate: one that embraces MEV and another that believes we need to cull MEV entirely.
Flashbots falls into the former, accepting that MEV is unavoidable and attempting to make the data transparent. The latter school of thought believes that MEV is equivalent to theft. The main idea is that arbitrageurs should not have access to prioritized transaction ordering. Those who hold this belief include Chainlink advisor and Cornell researcher Ari Juels. At Chainlink, Juels is working to implement a fair sequencing service. But whether to use Chainlink’s fair sequencing is also at dApp’s own choice because it is a matter of contract. MEV is one of the most critical areas of economic research for public networks. The approaches listed above are just an outline of two broad schools of thought on approaching MEV. There are a number of projects working on improving the situation of MEV.
Link to the original text: https://www.delphidigital.io/reports/what-you-should-know-about-mev-and-how-it-affects-gas-costs/?output=pdf
Don’t miss out
Subscribe now to receive notifications of our articles and newsletters: