We can all clearly understand the importance of mining for every net, no matter how big it is. However, sometimes miners might be hostile to all the other net participants and the MEV scheme can cause the unlucky users a significant commission increase without any particular reason. 🤨
What is MEV?
Miner extractacle value (MEV) is a way for gaining additional profit by changing the order of transactions before a new block is approved on a decentralised network, which is highly exploited by miners and validators nowadays.
As you know, every block recorded in the blockchain is immutable information and rewriting it is restricted by any net. However, miners and validators have found their way around by including, excluding or reordering transactions in their discretion’s future block right before the block confirmation. 🤯
How it works
MEV, which wasn’t initially a problem, soon became a malicious strategy, abused by thousands of miners all around the world. We will explain the procedure on this example:
Imagine, an Ethereum user wants to exchange his 10,000 USDC for ETH at a USDC/ETH DEX liquidity pool price of $2,000 per coin for. This is what happens once an application is placed ⬇️
- The mempool runs special bots that are constantly monitoring unconfirmed transactions and collecting all the necessary data about those like price or liquidity volumes from DeFi applications.
- After a bot notices a user planning to buy ETH, the system will initiate an operation of increasing the price of ETH right before the user’s transaction is executed. A bot can add more USDC to the USDC/ETH liquidity pool or buy some ETH from the latter to increase the price token’s price.
- Thus, the expected price of $2,000 per ETH coin, will be immediately changed to the artificial $2,500 per ETH coin. If the user does not notice the sudden price change and the transaction is completed they would only receive 4 ETH instead of 5 with the MEV operation initiator having a profit of that 1 ETH minus the cost of commissions.
Even though the situation does not have a real example and a person exchanging $10.000 would probably keep an eye on the rates, a high operation volume miner, using MEV would still be able to make some significant profit from the dozens of inattentive users. 👎
Since 2019 - the year, when the MEV term was first introduced there have been multiple other strategies developed upon it. 😵
The most used and common MEV practice is putting the MEV transaction before the original one. As mentioned above, special bots can track transactions with high potential by acting proactively. 🤖
Matching a transaction with some event - buying a significant part of tokens after a new pool was issued on UniSwap, for example. That way the exploiter takes the first place in the queue, completely emptying the pool and allowing the rest of the participants to sell for a decreased price, while selling the tokens for full price afterwards. 😡
The two previous schemes combined. The moment a bot finds a large buy order in the mempool, it tries placing an order in front of the victim’s one, possibly purchasing tokens at a lower price. Then, a large order is executed, moving the price up and backscreening is used to sell the coins at a profit before other users. 🥪
How to prevent MEV?
Ethereum is currently showing the flagship anti-MEV solutions. After miners earned $730 millions by exploiting MEV the team of second blockchain decided to fight back the strategy.
In 2020, Flashbots, a centralized system funded by venture capital firm Paradigm, were introduced as a panacea. The technology isn’t trying to eliminate the problem, but take the control over by creating an open market through the development of a public ETH transactions auction. 🙌
The solution became popular and started showing results soon. According to the research arm of the BitMEX crypto exchange, in May 2022, more than 90% of miners on the Ethereum network were connected and monitored by the Flashbots server. The researchers have also pointed out that 63% of the MEV transaction rewards were received by the server operators, with just the remaining 37% going to miners, consequently reducing the use of MEV. 😮💨
Even though the article used Ethereum as the main example, the problem is still out there for all the other projects and developers are still trying to increase the users safety and decrease the unnecessarily high commissions.
Check your rates before buying and stay tuned 📻