{"id":75577,"date":"2024-01-14T17:42:31","date_gmt":"2024-01-14T17:42:31","guid":{"rendered":"https:\/\/kryptodata.se\/what-is-mev-in-crypto\/"},"modified":"2024-01-14T17:42:31","modified_gmt":"2024-01-14T17:42:31","slug":"what-is-mev-in-crypto","status":"publish","type":"post","link":"http:\/\/kryptodata.se\/what-is-mev-in-crypto\/","title":{"rendered":"What Is MEV in Crypto?"},"content":{"rendered":"

Coinspeaker<\/a>
\nWhat Is MEV in Crypto?<\/a><\/p>\n

The rise of cryptocurrencies and blockchain technology has significantly enhanced traditional finance, enabling new ways of money exchange without the need for centralized intermediaries. However, these new decentralized ecosystems also pose challenges, such as maximal extractable value (MEV), which refers to various strategies through which validators or miners can manipulate the order and selection of transactions in a block to extract the maximum possible value.<\/p>\n

In this guide, we will delve into what MEV is, how it works, the different types of value extraction strategies, and the debate on whether MEV is positive or negative for the cryptocurrency ecosystem. Additionally, we will examine how bots and traders exploit market inefficiencies to claim profits originally intended for other users.<\/p>\n

What Is MEV About?<\/h2>\n

MEV, or maximal extractable value, refers to the maximum value that can be extracted by manipulating the order, inclusion, or exclusion of transactions within the blocks produced in a blockchain.<\/p>\n

The central idea behind the MEV concept is that those with influence over block production in a blockchain (miners in proof of work or validators in proof of stake) have power over which transactions they include and in what order to maximize their benefits at the expense of other network participants.<\/p>\n

The term “maximal extractable value” and the concept behind it were coined in 2019 by researcher Phil Daian and colleagues in an influential paper called “Flash Boys 2.0”.<\/p>\n

Originally, they referred to the concept as “miner extractable value”, focusing on the role of miners in proof-of-work blockchains like Bitcoin (BTC<\/a>) and Ethereum (ETH<\/a>) before the merge.<\/p>\n

However, with Ethereum’s transition to proof of stake, the term expanded to maximal extractable value, realizing that not only miners but also validators and other actors could influence the transaction order for their benefit.<\/p>\n

While the idea behind MEV has existed since the early days of Bitcoin, it has gained increasing relevance and research interest with the DeFi<\/a> industry explosion built on Ethereum in recent years.<\/p>\n

The programmable nature of smart contracts on Ethereum offers a much broader range of opportunities for complex value extraction strategies compared to more limited chains like Bitcoin.<\/p>\n

MEV Explained<\/h2>\n

MEV capitalizes on inherent latencies in blockchains and the competition among transactions for inclusion in new blocks. When a user sends a transaction, it is broadcast to the blockchain network and waits in the “mempool” for confirmation. The mempool is a queue of pending transactions that validators will use to construct new blocks.<\/p>\n

Validators then select which transactions to take from the mempool and arrange them within the new blocks they produce.<\/p>\n

They typically prioritize transactions with higher fees (gas fees) to maximize their income. However, validators have discretionary power over the final order and selection of transactions.<\/p>\n

For example, validators can identify opportunities such as price differences for a token between different decentralized exchanges, and predictable liquidation events in loan protocols, among other market inefficiencies. By reordering transactions related to these events, they can ensure their transactions are executed first to extract the maximum value from these opportunities.<\/p>\n

Notably, the role that MEV plays in the crypto ecosystem is controversial. For some, it is another manifestation of financial incentives to secure blockchain networks, similar to transaction fees or mining\/validation rewards.<\/p>\n

Meanwhile, for others, it introduces user experience problems, non-transparent costs, risks to network integrity, and decentralization. Mitigating MEV’s negative effects without losing its benefits is an active research topic.<\/p>\n

Types of MEV in Crypto<\/h2>\n

There is a wide variety of strategies through which actors in crypto can extract value by exploiting their ability to influence the order and selection of transactions on blockchains. Here are some of the most common types of MEV:<\/p>\n