Industries such as mining, block validation, yield farming, and staking have been transformed by adopting blockchain technology. Recently, the maximal extractable value (MEV) has been identified as a means for miners, validators, and others to generate higher profits. The article discusses the process of extracting MEV, its utilisation, and its impact on the blockchain industry.

Explaining Block Validation

The functioning of blockchain transactions is easy to understand. Transactions are started by network users, who then input the data into their accounts. The information is preserved in the blockchain mempool, which emerged from the BTC ecosystem.

Miners and validators determine the sequence of transactions, with a default ranking based on transaction size and gas fees. Miners can also use transaction reordering to validate the most profitable for their purposes. This process is mainly present in Proof-of-Work (PoW) consensus algorithms and Proof-of-Stake (PoS) algorithms but with differences.

How MEV Works

The MEV is a byproduct of transaction validation, allowing miners and validators to dictate the sequence of transactions to be processed out of the mempool. This ability has a significant impact on crypto prices, volumes, and distribution in the market.

Miners and validators can manipulate this power to increase or decrease asset prices. The MEV blockchain capabilities are applicable to both BTC and ETH, but they are more lucrative through ETH transactions due to smart contracts.

To capture MEV, miners and validators use their reordering privileges on the blockchain network, which varies depending on the network. Miners can always select transactions with the MEV and choose to process them first. Validators then use their computational resources or staking algorithms to confirm selected transactions and receive rewards.

The MEV process is trivial, but the consistent strategy of miners selecting transactions with the most significant gas prices gives way to several advanced strategies.

Ethereum’s Proof-of-Stake (PoS) method has forced the industry to change the official term from miner extractable value to maximal extractable value, with validators gaining advanced sequencing capabilities. The two MEV models are virtually identical, providing the same capabilities to respective users.

MEV In Blockchain

The MEV concept incentivises efficiency in the blockchain validation process by allowing miners and validators to approve more significant transactions. However, manipulating transaction sequencing and ordering presents many potential strategies to identify profitable MEV options.

Arbitrage

Thus, due to the MEV extraction and the nature of decentralised exchange platforms, users can conduct arbitrage in the modern crypto setting. Arbitrage is the process of purchasing an asset in one market and selling it on the other to make profits. However, decentralised exchanges lack effective means to combat price disparities due to automated market makers controlling the entire system.

Crypto Sandwich Attacks

The crypto sandwich attack is very manipulative and predatory. When MEV searchers detect a large transaction, they may conduct a sandwich attack, causing the transaction owner to suffer losses and benefit from price changes.

Front-Running

Front-running practices are considered less harmful to the general market but have ethical concerns. They involve creating automated bots to detect profitable transfer opportunities, which can be replicated and increase gas fee value.

DeFi Liquidation

DeFi liquidation is a widespread process of earning profits from decentralised networks, where users can liquidate collateral themselves without harming other users.

How MEV Practices Affect Blockchain?

Profitable MEV transactions are controversial due to potential market manipulation techniques. While seemingly harmless, these strategies can lead to losses for market players. Conventional markets and centralised exchanges prohibit these practices, causing market inefficiencies.

Industry leaders have criticised MEV as unethical and illegal. Despite mixed opinions, MEV extraction remains legal with DEXs. The crypto market may face more MEV regulations and restrictions as it becomes more regulated.

MEV practices in the blockchain landscape have led to network congestion, increased gas fees, and inefficiency. Despite being intended to fix these issues, MEV has caused a reverse effect on the market, incentivising superficial transactions and overloading blockchain systems.

Ethics concerns arise from the predatory nature of some MEV strategies, which can discourage users from placing orders. The unchecked MEV concept may go against decentralised finance’s focus on fairness, making users feel unsafe and in control. Therefore, current MEV practices require a limiting mechanism to minimise predatory attacks and encourage fair market transactions.

Final Thoughts

The MEV practice has significantly impacted the blockchain industry, with long-term implications for the entire market. To maximise the benefits of MEV, the crypto market must undergo regulatory changes and systematic adjustments, making it fair and prohibiting predatory strategies.

Grasping the intricacies of MEV can help make knowledgeable decisions in the crypto realm, allowing users to navigate the DeFi ecosystem with greater awareness and avoid being shortchanged by extractors. While complete elimination of MEV is not possible, advancements can reduce its impact, allowing users to confidently participate in swaps and potentially leverage MEV for their advantage.

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• Source: Plato Data Intelligence.