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1. Definition and background of MEV
MEV (Maximum Extractable Value) refers to the value extracted from users by reordering, inserting and reviewing transactions within the block, such as arbitrage, liquidation, etc. Fundamentally, it can be understood as "additional benefits obtained by adjusting the order of Tx when creating a new block".
After the merger of Ethereum, due to the change of the mining mechanism, the roles in the MEV supply chain have also changed. Before Danksharding was implemented, Flashbots proposed MEV-Boost as an out-of-protocol practice of PBS. Buider focuses on building blocks and maximizes the benefits of each block as much as possible, and then the most profitable blocks are submitted to proposers. The realization of the PBS mechanism has brought about some changes in the interests of the block chain industry, and at the same time promoted the professionalization and commercialization of relevant institutions in the industry chain, and also formed a new pattern for the MEV supply chain.
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Source: Flashbots
Compared with the conventional Tx on-chain process, MEV’s Tx on-chain process realizes PBS’s off-protocol practice through Flashbots’ MEV-Boost, and also makes MEV divided and captured by the roles of Searcher, Builder, and Validator.
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At present, there are projects in every link of the MEV supply chain. In the Searcher segment, there are many arbitrage and liquidation robots, DeFi traders, market makers, etc., and there are also projects that serve these Searchers, such as EigenPhi, a data platform that showcases on-chain arbitrage cases; in the Builder segment, there are Flashbots, BloXroute, Blocknative, etc. Professional organization; Relay is a neutral infrastructure in the MEV Supply Chain, which is a link that requires trust. There are mainly 11 active Relays; Validator also has many projects underway. Relatively speaking, Validator’s network has a certain degree of robustness , Judging from the recent financing situation, there are still new teams who want to start a business on this track.
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3. Classification of MEVs
According to the method of obtaining MEV, it can be mainly divided into the following categories:
Front Running: The behavior of preemptively executing by paying a higher Gas Fee than the target transaction in Mempool. For example, if Mempool contains a Tx of a certain trading pair, it will cause large fluctuations in the price of the Token. A Tx can be inserted before the Tx; or when a new NFT project is launched, the Tx of the Mint NFT will be preempted. At present, it is also simple to prevent being pre-empted. You only need to access the Private Transaction Pool similar to Flashboots Auction to obtain Frontrunning Protection;
Back Running: Refers to the behavior of inserting a transaction after a transaction when a transaction will cause large price fluctuations, which may be arbitrage, liquidation, etc. For example, a large amount of Tx occurred on the chain, which caused the price fluctuation of a certain trading pair, and then inserting a transaction can not only equalize the price of DEX, but also make profits for arbitrageurs; or a mortgage occurred on the chain After the loan triggers the liquidation line, insert a liquidation order after it;
Sandwith Attack: Sandwich attack is actually a combination of Front Running and Back Running. Searchers search for potential large-value transactions in Mempool, and preemptively buy assets that will eventually appreciate in value before the transaction occurs, and sell these assets immediately after the large-value transaction is executed, thereby earning the price difference;
Judging from the results of these MEVs, generally Back Running MEVs are benign to the blockchain network. For example, arbitrageurs use the price difference between two DEXs + flash loans to achieve risk-free arbitrage, and liquidators maintain the loan agreement. Healthy operation; Front Running, Sandwith Attack may cause loss of interest to other users.
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4. Current status and future of MEV
In fact, MEV is controversial, because the existence of non-benign MEV does not seem to be moral. For example, Front Running, Sandwith Attack, and Time Bandit Attack will destroy the transaction experience and harm the interests of ordinary users on the blockchain. Therefore, I have hoped for a long time that the industry can introduce a plan/product/protocol to prevent the occurrence of these non-benign MEVs.
However, the publicly visible characteristics of transactions in Mempool and the bidding rules for Tx on-chain sorting determine that MEV must exist. The next best thing is to use a product/protocol that feeds benefits back to you if your transactions cannot avoid MEV withdrawals.
Regarding the negative externalities (Negative Externalities) that MEV (especially non-virtuous MEV) may bring to stateful blockchains (such as Ethereum), there are currently some products in the industry that can mitigate these risks. For example, the Falshbots series of products:
Flashbots Auction: Flashbots Auction provides a private communication channel between Ethereum users and Validators for efficiently communicating preferred transaction order within a block. Through such products, on-chain transaction users can realize Pre-trade Privacy, Failed trade privacy, Finality protection, etc.
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Image source: IOSG Ventures Jiawei
From the perspective of MEV Supply Chain, these three products play a role in each link of MEV Supply Chain.
For the future of the MEV field, combined with the analysis of the development status of the MEV field, we believe that there may be the following main trends:
1. The head effect will be very serious: more than 90% of the past 500 Epochs are served by MEV-Boost, and the Flashbots series of products are almost in the leading position in all aspects of block production during the PoS period. In the case of Mover, new entrants who want to enter the MEV field need some core competitiveness to seize more market share;
2. Those who get Orderflow win the world: To get more MEV opportunities, it is very important to have sufficient Orderflow. For ordinary trading users, there is actually no way to completely eliminate MEV. Even if User adopts Flashbots Protect RPC, it can only prevent the Searcher of Public Mempool from capturing the potential MEV of its Tx, and the Buider in the Flashbots Auction network still has the opportunity to extract MEV for its Tx. Therefore, for ordinary users, since it is impossible to completely avoid the extraction of MEV, it is better to choose Wallet, DEX or other Dapps that will feed back MEV revenue to Users;
3. The MEV of Multichain still has room to grow: the MEV in the pure Ethereum chain may have been fully captured. However, the blockchain is a Multichain ecology. It is still difficult to capture the MEV opportunities between Layer 1 and Layer 1, and between Layer 1 and Layer 2. There may be some room for growth in MEV in this regard;
