• The DeFi boom has encouraged Ethereum miners to take advantage of users by arbitrarily reordering blocks for profit.
  • The MEV strategy is usually performed by third-party bots, allowing miners to charge high transaction fees.
  • Block producers can use arbitrage to earn a profit by buying low on DEXs and selling high on other exchanges.

With the decentralized finance ecosystem gaining over $43 billion in total value locked, there is growing adoption of a new loophole in the Ethereum code to exploit unwary users. 

The science behind Miner Extracted Value or “MEV”

Miner Extracted Value (MEV) originated from how the Ethereum network is structured as it gives miners the right to validate transactions as they wish. Such power gives them the ability to execute arbitrage, get access to token offerings, and perform liquidations – all without spending a dime.

Indeed, Ethereum miners can extract a significant amount of profits by identifying trades on decentralized exchanges (DEX) and reorder them arbitrarily. They can even censor transactions on the blockchain at the expense of users. 

By default, miners can choose to rearrange the transactions that are processed on the blockchain and decide whether to include or exclude them within a block. This is an existing dynamic that could have a major impact on the user experience of DEXs. 

While Ethereum is still running on a proof-of-work consensus algorithm, there is no guarantee that transactions will be ordered in the same sequence as they were submitted to the network. Miners can take advantage of this feature and look at the unconfirmed transaction on the mempool to select which transactions are validated. 

For this reason, the transactions with the highest transaction fees usually are confirmed first as it guarantees miners higher returns.   

As explained by research analyst Igor Igamberdiev, miners that are extracting MEV could make markets more efficient for end-users. But when competition for higher returns turns fierce, they can significantly impact the network’s security. 

More than $330 million has been extracted by MEVs since January 1, 2020, and roughly $6.2 million were produced in wasted fees by failed MEV transactions, according to research group Flashbots. 

Cumulative Value Extracted by MEV

Cumulative Value Extracted by MEV

Even though the upcoming EIP-1559 upgrade and Ethereum’s transition into proof-of-stake does not necessarily fix this issue, some cryptocurrency enthusiasts have proposed other ways to tackle it. MEV Auction (MEVA) was introduced to auction off the right to reorder transactions on the ETH network. 

The proposal has faced backlash as it does not help reduce decentralization. 

Ed Felten, the co-founder at Off-chain Labs, said that while MEVA tries to separate transaction ordering from transaction censorship, it ends up being controlled by the same party. Thus, Fekten believes that “the community’s energy is better spent on reducing front-running.”

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Cryptos feed Join Telegram

Recommended content


Recommended Content

Editors’ Picks

Three reasons why DOGE price will not be back above $0.17 anytime soon

Three reasons why DOGE price will not be back above $0.17 anytime soon

Dogecoin price is at the cusp of saying goodbye to $0.10 as the price is set to drop another leg lower in the coming week after DOGE price consolidated below that same $0.10. With such a move, losses would sum up to 55% of depreciation.

More Dogecoin news

Cardano price could go either way next week, but downtrend still rules

Cardano price could go either way next week, but downtrend still rules

Cardano price closes the week with another loss on the books. ADA price looks set to instead chose more downside as investors are turning away from cryptocurrencies. Expect another drop with at least a retest at $0.415.

More Cardano news

Why another 60% drop in SHIB price is inevitable

Why another 60% drop in SHIB price is inevitable

Shiba Inu price is too far gone from the significant pivotal level of $0.00001708 to make a strong comeback for now. Expect to see price action consolidate around current levels, slightly above $0.00001000, before another round of tail risks will come back to bite price action.

More Shiba Inu news

A weekly close below $0.50 spells another correction ahead for XRP price

A weekly close below $0.50 spells another correction ahead for XRP price

Ripple (XRP) price came close to a full recovery after the positive shift in sentiment on Friday, but as long as price action remains below $0.50, there is still no evidence of a fundamental turnaround in sentiment. Expect to see further downward pressure as several bearish pressures are not easing.

More Ripple news

Bitcoin: The last rebound before capitulation

Bitcoin: The last rebound before capitulation

Bitcoin is showing bullish signs in the lower time frames, which can be taken advantage of by traders in the next couple of days. But looking at BTC from the higher time frames suggests that the bottom is not in yet.

Read full analysis

BTC

ETH

XRP