Summary
- MEV refers to the maximum value that can be extracted from block production (in excess of the standard block reward and gas fees) by block producers via including, excluding, and choosing the order of transactions in a block.
- It is a subject of debate in the industry and there has been a massive increase in R&D to refine solutions such as PBS and relayers in order to address MEV challenges
- MEV-research can be leveraged to inform how blockchains are designed and refined, improve protocol security and create financial incentives to improve price and trading execution efficiency.
MEV (Maximal Extractable Value) is a topic within the crypto industry that has seen a massive uptick in research and development recently as well as discussion and debate within the industry given its adversarial nature.
These days, some of the top builders within crypto are working on technological solutions to mitigate some of the harmful effects while highlighting the market fairness and efficiency that it brings.
Background brief
In order to understand what MEV is, it is first important to understand how blockchain transactions are typically ordered and finalized:
When someone sends a transaction in the blockchain, there is a delay between the time when the transaction is broadcasted to the network and when it is actually included into a block. During this period, transactions sit in a pending transaction pool called the mempool where contents are visible to everyone. (mev.wiki)
Depending on the protocol and the design of the mempool (variations in block size and block time), transactions in a mempool could take anywhere between a few seconds to a couple of hours to confirm.
During the time that transactions are in the mempool, block producers have full autonomy in selecting which pending transactions they will include in their block. This has led to the proliferation of ‘searchers’, aka bots that run algorithms on the mempool data they have access to. These bots work to detect profitable MEV opportunities that may arise from ordering pending transactions and including their own in such that they can profit. MEV refers to the maximum value that can be extracted from block production (in excess of the standard block reward and gas fees) by including, excluding, and choosing the order of transactions in a block.
High-level Pros and Cons of MEV
On a high-level, the ability for block producers to determine the order of transactions can be detrimental to a naive user’s experience on the blockchain. MEV can lead to worse execution for users because block producers and searchers can profit off of the information users convey in their unconfirmed transactions. MEV can also lead to negative externalities such as surges in gas fees.
On the other hand, MEV-research can be leveraged to inform how blockchains are designed and refined, their applications and supporting infrastructure. This could improve protocol security and create financial incentives to improve price and trading execution efficiency.
Emerging solutions
There has been an emergence of R&D and solutions in recent years that seek to alleviate some of the effects. For example, relayers such as Flashbots connect searchers and mining pools together in an open-sourced manner, reducing the effectiveness of generalized frontrunners and thereby lowering the price to transact for ordinary users.
Another mechanism gaining traction is “proposer-builder-separation” (PBS), designed to combat blockchain censorship and the principal-agent problem by isolating the roles of block construction (the ordering / building of blocks) and block proposing (validation).
In addition, PBS limits the information within a block until after a validator accepts all the transactions within a block, thereby eliminating the centralization pressures that come from MEV and making the blockchain MEV-resilient.
As MEV continues to dominate discussions in crypto, innovative solutions that leverage cutting-edge cryptographic & game-theoretic solutions are currently in the works to ensure that the harmful effects of MEV are eliminated while the positive effects remain.
