In this post ‘What is MEV’, we are going to explore everything you need to know about Maximal Extractable Value - a hot topic among blockchain users. A growth in DeFi has been fueling increasing interest in MEV extraction in recent years. As the name suggests, MEV means the maximum value that users can derive from a DeFi protocol or a smart contract.
MEV offers users an additional source of income besides the standard block rewards and gas fees. Validators of blocks on a blockchain network (for instance Ethereum) can extract additional value by manipulating the order of transactions in a given block. The MEV opportunities arise because of the decentralized nature of the blockchain, in which miners and validators can prioritize transactions offering greater value at the cost of other network participants.
In this What Is MEV? guide, we are going to explore what is the Maximal Extractable Value, MEV extraction, MEV strategies, and MEV bots. So, let’s begin with answering what Is MEV 2024 and what is MEV used for.
1. Maximal Extractable Value Explained - What Is MEV?
Cryptocurrencies run on blockchains which are decentralized ledgers. There are no central authorities like central banks or other financial institutions to control blockchains and the transactions within. Because of the decentralized nature of blockchains, it’s the miners or validators who complete blocks and keep the blockchains running. Miners and validators earn rewards and transaction fees as an incentive to deploy their time and resources. So, they would like to maximize the value they can extract from what they do. Identifying the best crypto to mine in 2024 is crucial for optimizing their efforts and returns in the ever-evolving landscape of cryptocurrency mining.
Monitor the Ethereum blockchain for fresh transactions with MEV bots!
In a blockchain, irrespective of its consensus mechanism, pending transactions are held in a waiting area called ‘mempool’ (a contraction of memory and pool). Miners and validators can look into the ‘mempool’, select transactions and verify them to complete blocks. This is where the idea of MEV in cryptocurrency originates. Miners and validators can reorder and manipulate transactions in several ways (coming to this shortly) to extract maximum value in addition to their block rewards and gas fees.
The term MEV was first used in 2019 by Phil Daian and a team of smart contract researchers who wrote the paper named “Flash Boys 2.0.” They initially used the term to denote ’miner extractable value’ and defined it as the “total amount of ETH miners can extract from manipulation of transactions within a given time frame.”
At that time ETH was based on the Proof-of-Work (PoW) consensus mechanism which involves mining. Therefore, MEV was initially conceptualized in the context of PoW blockchains, in which miners govern the order of transactions to be included in blocks to derive maximum value from a blockchain.
Later as Ethereim migrated to Proof-of-Stake (PoS), the definition of MEV shifted to “maximal extractable value” to include a range of methods of extracting MEV - for those wondering what is proof of stake (PoS) we have a dedicated article on the topic. Since then, there has been a considerable rise in interest in MEV in crypto and MEV extraction. Subsequently, different MEV strategies have been devised. The role of MEV in the cryptocurrency ecosystem has been increasing rapidly. So, let’s look at how does MEV work through different MEV trading strategies.
2. MEV strategies
The MEV process can be a bit complicated for beginners, which is also why we also have a guide on cryptocurrency investing for beginners where we explain the risk management rules to protect capital while investing in crypto. Now, going back to MEV, there are several innovative ways of extracting MEV value by reordering transactions or manipulating them in several ways such as liquidation, front-running, arbitrage, and sandwich attack.
Searchers can look for liquidation opportunities in a DeFi lending ecosystem in which borrowers need to keep collateral to avail of crypto loans. When a borrower fails to make a repayment, the lending application allows other users to liquidate the collateral and gain liquidation fees. Searchers looking for MEV opportunities can benefit from such liquidation.
Take advantage of blockchain transactions and maximize your profits by using MEV!
In front-running, an MEV bot searches the most profitable transactions from the mempool and replicates the original transaction with a higher gas fee. This incentivizes miners/validators to prioritize this transaction over the cost of other transactions. Therefore, even though front-running can be beneficial for the searchers, it can disrupt the flow of the transaction validation process.
A crypto token can have different prices on different decentralized exchanges (DEXs) based on their relative demand and supply. MEV bots looking for arbitrage opportunities can profitably exploit these price differences by buying an asset at a lower price from one exchange and selling the same at a higher price in another exchange. Note that arbitrage is a highly competitive game. However, it benefits the overall crypto ecosystem by helping in better price discovery and lowering the price differences across exchanges.
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In sandwich attacks in MEV, users benefit from manipulating the price of crypto tokens. In a sandwich attack, an attacker/searcher looks for a large pending transaction (which can significantly distort price) on a DEX. Next, the attacker/searcher sandwiches that trade between their trades. In other words, the attacker/searcher places trades using the same token immediately before and after the pending large transaction.
This way the attacker/searcher benefits from the temporary price discrepancy. It can pump up the price of the token by placing a trade before the target transaction, thereby forcing the victim to buy at a higher price. The attacker then sells tokens at a higher price to benefit while imposing losses on the victim. MEV bots play a crucial role in all these MEV strategies.
3. What are MEV bots and How do MEV bots work?
Theoretically, network miners and validators are supposed to get the entire MEV available in a transaction. However, in reality, there are “Searchers” who are independent network members using MEV bots to automate MEV extraction with minimum effort. So, what is MEV bot?
Instead of mining pick a reliable crypto exchange!
In simple words, MEV bots are software tools that are designed to monitor a blockchain to look for profitable transactions that can offer maximum MEV value and automatically submit the most profitable transaction to the network for completion. This automaiton of MEV extraction benefits miners and validators as well. This is because miners and validators receive added gas fees from “Searchers” looking forward to getting their transactions added to the blocks. There are also MEV Arbitrage Trading Bots which exploit price differences across exchanges, and similarly to high-frequency crypto trading bots, they are an effective in executing profitable trades.
4. What Is MEV 2024 - FAQs
4.1 📊 Are MEV bots profitable in 2024?
MEV bots automate the identification and execution of MEV opportunities. Therefore, they can be profitable if deployed in the right way.
4.2 🔐 Does MEV apply only to Proof-of-Work (PoW) blockchains?
MEV refers to extracting maximum value from a blockchain ecosystem, such as a DeFi protocol. MEV applies to blockchains running on different consensus mechanisms, including Proof-of-Work (PoW) and Proof-of-Stake (PoS).
4.3 📝 What is the invisible tax in crypto?
MEV is often referred to as an invisible tax in crypto, which miners/validators can potentially collect from users by reordering transactions or manipulating them in different ways. This guide on What Is MEV explains different aspects of MEV in simple words.
What Is MEV?
In this post ‘What is MEV’, we are going to explore everything you need to know about Maximal Extractable Value - a hot topic among blockchain users. A growth in DeFi has been fueling increasing interest in MEV extraction in recent years. As the name suggests, MEV means the maximum value that users can derive from a DeFi protocol or a smart contract.
MEV offers users an additional source of income besides the standard block rewards and gas fees. Validators of blocks on a blockchain network (for instance Ethereum) can extract additional value by manipulating the order of transactions in a given block. The MEV opportunities arise because of the decentralized nature of the blockchain, in which miners and validators can prioritize transactions offering greater value at the cost of other network participants.
In this What Is MEV? guide, we are going to explore what is the Maximal Extractable Value, MEV extraction, MEV strategies, and MEV bots. So, let’s begin with answering what Is MEV 2024 and what is MEV used for.
Contents
1. Maximal Extractable Value Explained - What Is MEV?
Cryptocurrencies run on blockchains which are decentralized ledgers. There are no central authorities like central banks or other financial institutions to control blockchains and the transactions within. Because of the decentralized nature of blockchains, it’s the miners or validators who complete blocks and keep the blockchains running. Miners and validators earn rewards and transaction fees as an incentive to deploy their time and resources. So, they would like to maximize the value they can extract from what they do. Identifying the best crypto to mine in 2024 is crucial for optimizing their efforts and returns in the ever-evolving landscape of cryptocurrency mining.
In a blockchain, irrespective of its consensus mechanism, pending transactions are held in a waiting area called ‘mempool’ (a contraction of memory and pool). Miners and validators can look into the ‘mempool’, select transactions and verify them to complete blocks. This is where the idea of MEV in cryptocurrency originates. Miners and validators can reorder and manipulate transactions in several ways (coming to this shortly) to extract maximum value in addition to their block rewards and gas fees.
The term MEV was first used in 2019 by Phil Daian and a team of smart contract researchers who wrote the paper named “Flash Boys 2.0.” They initially used the term to denote ’miner extractable value’ and defined it as the “total amount of ETH miners can extract from manipulation of transactions within a given time frame.”
At that time ETH was based on the Proof-of-Work (PoW) consensus mechanism which involves mining. Therefore, MEV was initially conceptualized in the context of PoW blockchains, in which miners govern the order of transactions to be included in blocks to derive maximum value from a blockchain.
Later as Ethereim migrated to Proof-of-Stake (PoS), the definition of MEV shifted to “maximal extractable value” to include a range of methods of extracting MEV - for those wondering what is proof of stake (PoS) we have a dedicated article on the topic. Since then, there has been a considerable rise in interest in MEV in crypto and MEV extraction. Subsequently, different MEV strategies have been devised. The role of MEV in the cryptocurrency ecosystem has been increasing rapidly. So, let’s look at how does MEV work through different MEV trading strategies.
2. MEV strategies
The MEV process can be a bit complicated for beginners, which is also why we also have a guide on cryptocurrency investing for beginners where we explain the risk management rules to protect capital while investing in crypto. Now, going back to MEV, there are several innovative ways of extracting MEV value by reordering transactions or manipulating them in several ways such as liquidation, front-running, arbitrage, and sandwich attack.
Searchers can look for liquidation opportunities in a DeFi lending ecosystem in which borrowers need to keep collateral to avail of crypto loans. When a borrower fails to make a repayment, the lending application allows other users to liquidate the collateral and gain liquidation fees. Searchers looking for MEV opportunities can benefit from such liquidation.
In front-running, an MEV bot searches the most profitable transactions from the mempool and replicates the original transaction with a higher gas fee. This incentivizes miners/validators to prioritize this transaction over the cost of other transactions. Therefore, even though front-running can be beneficial for the searchers, it can disrupt the flow of the transaction validation process.
A crypto token can have different prices on different decentralized exchanges (DEXs) based on their relative demand and supply. MEV bots looking for arbitrage opportunities can profitably exploit these price differences by buying an asset at a lower price from one exchange and selling the same at a higher price in another exchange. Note that arbitrage is a highly competitive game. However, it benefits the overall crypto ecosystem by helping in better price discovery and lowering the price differences across exchanges.
Discover the best crypto exchanges on the market!
In sandwich attacks in MEV, users benefit from manipulating the price of crypto tokens. In a sandwich attack, an attacker/searcher looks for a large pending transaction (which can significantly distort price) on a DEX. Next, the attacker/searcher sandwiches that trade between their trades. In other words, the attacker/searcher places trades using the same token immediately before and after the pending large transaction.
This way the attacker/searcher benefits from the temporary price discrepancy. It can pump up the price of the token by placing a trade before the target transaction, thereby forcing the victim to buy at a higher price. The attacker then sells tokens at a higher price to benefit while imposing losses on the victim. MEV bots play a crucial role in all these MEV strategies.
3. What are MEV bots and How do MEV bots work?
Theoretically, network miners and validators are supposed to get the entire MEV available in a transaction. However, in reality, there are “Searchers” who are independent network members using MEV bots to automate MEV extraction with minimum effort. So, what is MEV bot?
In simple words, MEV bots are software tools that are designed to monitor a blockchain to look for profitable transactions that can offer maximum MEV value and automatically submit the most profitable transaction to the network for completion. This automaiton of MEV extraction benefits miners and validators as well. This is because miners and validators receive added gas fees from “Searchers” looking forward to getting their transactions added to the blocks. There are also MEV Arbitrage Trading Bots which exploit price differences across exchanges, and similarly to high-frequency crypto trading bots, they are an effective in executing profitable trades.
4. What Is MEV 2024 - FAQs
4.1 📊 Are MEV bots profitable in 2024?
MEV bots automate the identification and execution of MEV opportunities. Therefore, they can be profitable if deployed in the right way.
4.2 🔐 Does MEV apply only to Proof-of-Work (PoW) blockchains?
MEV refers to extracting maximum value from a blockchain ecosystem, such as a DeFi protocol. MEV applies to blockchains running on different consensus mechanisms, including Proof-of-Work (PoW) and Proof-of-Stake (PoS).
4.3 📝 What is the invisible tax in crypto?
MEV is often referred to as an invisible tax in crypto, which miners/validators can potentially collect from users by reordering transactions or manipulating them in different ways. This guide on What Is MEV explains different aspects of MEV in simple words.