MEV
#defi
MEV (Maximal Extractable Value) is a measure of the profit a miner (or validator, sequencer, etc.) can make through their ability to arbitrarily include, exclude, or re-order transactions within the blocks they produce. For example, rather than letting a trader pay them (miners) a transaction fee for the privilege of collecting the arb profit, a miner could simply decide to run this strategy themselves.
Arbitrage bots typically look for specific types of transactions in the mempool (such a DEX trade or an oracle update) and try to frontrun them according to a predetermined algorithm. Generalized frontrunners look for any transaction that they could profitably frontrun by copying it and replacing addresses with their own. They can even execute the transaction and copy profitable internal transactions generated by its execution trace.
Let’s take a look at what kinds of actors are in an advantageous position in the blockspace marketplace and have access to more MEV opportunities.
Validators (miners) who both (a) produce blocks by picking and ordering from a pool of pending transactions and (b) propose blocks to add to the Ethereum network. This gives them the ability to extract value by ordering transactions in a way that maximizes the profits that their bots are generating.
Arbitrage bot operators, who devise MEV strategies for frontrunning, backrunning, and sandwich attacks, then making sure their transactions get included before the user they’re trading against by paying a higher gas fee or by sending the transaction to the miner themselves. The miner could be the one to operate a bot, but this is a game of know-how and expertise; some miners won’t be as sophisticated as the quantitative actors extracting MEV.
MEV is commonly misconceived as Miner Extractable Value, but as we discovered above, this is not accurate: MEV is value extracted by those taking advantage of some mechanism can dictate transaction ordering such as Ethereum’s Priority Gas Auctions (PGAs). PGAs happen when arbitrage bots often compete against each other by bidding up transaction fees (gas) in what we call PGAs, starting a bidding war for the right to capture the arbitrage
MEV in ETH 2.0
Since the transaction ordering process in eth2 will be the same as that of PoW Ethereum, it is reasonable to think that MEV opportunities will still exist as we know them today. The difference lies in who has ultimate control over the ordering, namely validators rather than miners, who have been selected to propose a beacon block which will contain a fresh eth1 block they queried from the eth1 client.
This means a technology such as Flashbots’ MEV-geth (a modified eth1 client software optimized for MEV extraction) that allows eth1 transaction senders to tip the block proposer (and transaction orderer) for their preferred ordering could still exist.
While there are changes in how consensus is reached in eth2, transaction ordering within each eth1 block is the same as it is today, both in the software that orders transactions (eg. a Ethereum PoW client such as Geth) and in the p2p network transactions are gossiped through.
A study by Flashbots found that "at the current level of validators (160k), we find that MEV can increase validator rewards by 75.3%, or give an APR of 12.86% rather than a non-MEV APR of 7.35% from staking eth". It suggests that MEV extraction will be a lot more desirable in eth2 than it is in eth1, and that there may be a big push from stakers to earn MEV-enabled staking yields, this means more eth holders will be compelled to be validators which in turn means ethereum will be more secure by having a larger set of validators.
The Flashbots study also finds that This shows MEV extraction amplifies the inequality between validators that’s created from block-proposal luck. For example for 100,000 validators, the mean number of blocks proposed per validator per year is 26 yet the unluckiest 1% of validators will have the opportunity to propose at most 15 blocks, and the luckiest 1% at least 39.
we worry that MEV could amplify oligopolic dynamics in eth2 by enriching the entities with the most 32-eth stakes faster than the ones with less (rich-get-richer dynamics). This would make democratizing MEV extraction especially important in eth2 in order to preserve decentralization of consensus voting power.
Resources
Last updated