Maximal extractable value (MEV) in crypto, previously known as miner extratable value prior to the Ethereum Merge in September 2022, is a phenomenon in both proof-of-stake (PoS) and proof-of-work (PoW) blockchain networks, referring to the ability of miners and validators to profit by strategically reordering, including, or excluding transactions within a block. This practice, sometimes called the “invisible tax,” goes beyond the usual block rewards and transaction fees, optimizing profitability for those who control the block creation process.

How Does MEV Extraction Work?

When a user submits a decentralized finance (DeFi) transaction, it is placed in the mempool, a public waiting area where pending transactions are held until they are included in a block by a miner (PoW) or validator (PoS). These block producers can prioritize transactions based on profitability rather than the standard transaction fees, creating opportunities for additional gains through various MEV strategies.

Common MEV Extraction Strategies

There are a few ways miners and validators can extract value from various transactions. Front-running involves inserting a transaction before a target transaction to profit from the impact the target transaction will have on the market price. By paying higher gas fees or colluding with block miners, front-runners ensure their transactions are prioritized. Another strategy is a sandwich deal, or sandwich attacks, which surrounds a target transaction with two of the validators’, or actors’ transactions. The actor first executes, or creates, a buy order to drive up the price, then the target transaction occurs, followed by the actor’s sell order to capitalize on the increased price.

Decentralized exchange (DEX) arbitrage opportunities arise when there are price discrepancies for the same token across different DEXs. MEV actors buy the token at a lower price on one exchange and sell it at a higher price on another. Liquidation in DeFi lending protocols is another strategy. If the value of collateral drops below a certain threshold, it triggers liquidation. MEV actors compete to perform these liquidations, earning rewards for their speed and priority.

MEV Pros and Cons

The benefits of MEV include rapid liquidation, which ensures the solvency of DEXs by quickly addressing collateral drops. There is also the benefit of adding competition to validate profitable transactions, overall improving network security.

However, the drawbacks of MEV include high slippage, as sandwich deals and other strategies can significantly worsen the end-user experience by increasing slippage. Additionally, excessive focus on MEV can lead to instability in the network’s consensus mechanisms coming from the platform reordering MEV opportunities.

Common MEV Attacks

MEV attacks are seen often in the crypto space, and there are a few different kinds. NFT MEV involves techniques similar to traditional MEV strategies applied to NFT markets, when someone is the first to buy an undervalued NFT or manipulates prices in NFT drops, resulting in a changing value. Liquidations, as previously mentioned, can also be executed more aggressively, with MEV actors prioritizing liquidations that result in higher fees.

Uncle-bandit attacks exploit transactions in uncle blocks (orphaned blocks) to reorder profitable transactions into the main chain, benefiting from the price changes caused by the original transaction. Time-bandit attacks involve reorganizing past blocks to exploit profitable opportunities, similar to a 51% attack but focused on past transactions rather than future ones.

Mitigating MEV Exploitation in Cryptocurrency

One approach to mitigate MEV exploitation is through MEV auction mechanisms, which create a fair and transparent system for allocating MEV profits. Instead of allowing miners to directly extract value from transactions, an auction-based approach enables all participants to bid for the right to include their transactions in a block. Another approach involves initiatives like Flashbots and MEV-Geth, which allow for private transaction submissions, preventing front-running and ensuring fairer transaction ordering.

Developers can also mitigate MEV by designing smart contracts that are resistant to front-running and other MEV strategies. Regular audits can help identify and fix vulnerabilities. Furthermore, utilizing decentralized exchanges and Layer 2 solutions reduces the risk of MEV attacks by eliminating central control over transaction sequencing.

While MEV presents both challenges and opportunities within blockchain networks, its complete elimination is still a challenge developers have to face. Continued awareness of MEV and knowing how to spot a potential MEV attack could help save you money.

One way to protect against MEV attacks is to use Oasis’ default-MEV protection and hidden mempool, shielding user and transaction data from lending, staking or swapping transactions away from bad actors. Integrating the Oasis Privacy Layer, a framework for EVM chains to access the benefits of Sapphire without any complex integration, users can privately pass messages and assets while protecting the information from those who are unauthorized to see it. With Sapphire, MEV protection is the default.

Read more about how Oasis protects against MEV.