Currently one of the biggest debates around Ethereum (ETH) is the Miner Extractable Value (MEV). MEV is the practice of miners ordering (or being paid for ordering) transactions to enter into front-run or back-run transactions by other users.
Image source: https://libertex.com.
Miner Extractable Value (MEV) was documented by researchers at Cornell University in a study back in April 2019. They wrote that "MEV is a real threat to Ethereum today". Since then, the practice has become more widespread, especially with the general rise of smart contract platforms, DeFi and decentralised exchanges (DEXs).
Theoretically, MEV can also be found on the Bitcoin (BTC) network, but experience has shown that inherently BTC is less exposed to MEV than blockchains like Ethereum.
But how big a problem is Miner Extractable Value? Well, opinions vary, depending on which camp you ask. Researchers say it's a serious problem that will be difficult to fix. Ethereum figures show that the effects are fairly moderate and can be circumvented.
Image source: https://blog.triv.co.id.
Independent researchers studying MEV almost unanimously agree that it is a serious problem on today's smart contract platforms.
"My university group coined the term in a study on the growth of bots in 2019. We documented significant and in some cases deeply disturbing effects. Among other things, many users were begging arbitrageurs online to give them back money they couldn't afford to lose." - said Professor Ari Juels, who co-authored the 2019 paper with colleagues at Cornell University.
Juels added that MEV "has since become much more widespread and aggressive". Ittay Eyal, an adjunct professor at Technion - Israel Institute of Technology, who has also researched and written about the problem, echoes this view.
"Miner Extractable Value is very real and causes real damage. It directly increases the cost of using DeFi among users, as they divert part of their profits to bot armies."
Basically, MEV consists of reordering the sequence of transactions so that the user can benefit if his transactions are approved before or after other transactions. For example, a user may pay a ridiculously high gas fee to have a certain ETH purchase confirmed before the ETH price rises (or vice versa) in order to sell it for a profit.
"The order in which blocks are transacted is prioritised by the miners and the highest gas bid is accepted first. Arbitrageurs are willing to pay very high prices to take their transactions first in the queue and get into the bidding war, which becomes a negative externality for everyone." - said Lex Sokolin, Chief Economist and Co-Head of Global Fintech at Ethereum-focused blockchain firm ConsenSys.
Not everyone agrees that MEV is a serious problem in the sense that it interferes substantially with its normal functioning.
"As far as 'damage' is concerned, I would say that it is fairly moderate for now: most MEV abuse is in the form of front-running trading of DEXs to profit from them. And we are already seeing some solutions (e.g. Taichi Network, MistX, etc.) that mitigate this. There are also more damaging types of MEVs, but I'm not aware of any cases that have happened on the Ethereum network." - states Tim Beiko, Ethereum developer.
According to Flashbots (the organisation that presents MEV in a positive light), miners have so far made a profit of around USD 109 million from Miner Extractable Value. However, this is MEV arranged through Flashbots' platform, so the actual profit from all MEV activity is likely to be higher.
Image source: https://tokeneo.com.
The existence of Flashbots points to the view, at least among miners and some stakeholders, that MEV can be used for good things. And there seems to be some consensus that MEV exists on a spectrum, and is worse in some cases than others.
"Miner Extractable Value" is an umbrella term that encompasses arbitrage that is " good" and "bad" in terms of users' transaction costs. Distinguishing the good from the bad MEV is still an open research problem." - said Ari Juels.
Some industry players believe that the MEV is probably a response to the Ethereum development proposal (EIP-1559), which reduces miners' revenue from fees, forcing mining pools/companies to look for alternative sources of revenue. However, according to Ittay Eyal, the loss of revenue from EIP-1559 does not really justify the MEV.
"EIP-1559 is expected to reduce miners' revenue by burning a significant portion of the transaction fees paid by users. I don't think the solution to this is to take users' money in a more insidious way. Instead, the rewards could be increased or the number of miners reduced, thereby reducing Ethereum's ecological footprint."
On the other hand, the people working on Ethereum believe that MEV is "part of life" and that the solution to the problem is not to eliminate it completely, but to find a way to reconcile it with the broader goals of Ethereum.
Image source: https://static.news.bitcoin.com.
"The debate about MEV is about how to create transaction pools that pay miners real value and get them to opt out of gas auctions for a different mechanism. It's not about miners doing coercive or uneconomic activities, these are issues that are now part of protocol and capital markets in general." - said Lex Sokolin.
He added that in the sense of finding the optimal/most equitable mechanisms to settle the blocks, Miner Extractable Value is not a threat in itself.
"It's just about designing a unique gas pricing mechanism and making the ordering of transactions on the Ethereum core network a well-understood topic. I think the work done by Flashbots has been very useful for the ecosystem and will continue after the transition to EIP-1559 and staking."
Tim Beiko has a similar opinion. He argues that we need to find ways to live with MEV while reducing its worst effects.
"I think my view on the Miner Extractable Value is that we should try to minimize it, but then we should try to democratize access to capture the remaining MEV. This seems to be the "least worst" option.
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The question is, how much can the MEV be minimised?
"I think there are technical approaches that can get us much closer to a fair ecosystem if we prevent miners from rearranging transactions to exploit MEV. This includes reordering transactions in a secure way by encrypting transactions. And only after the reordering is done can the encryption take place, or the transactions are sorted according to the time they were received," says Ari Juels.
Juels also admits that Miner Extractable Value is a tricky concept and phenomenon, so there is still a lot of work to be done before the industry can come up with a meaningful solution or mitigation.
Tim Beiko agrees with this assessment, and again believes that it is likely to be a matter of minimising MEV, not eliminating it.
"There are a number of application-level solutions to address MEV. It is a complex problem, and each type of Miner Extractable Value must be fundamentally solved independently. I am not an expert on the different approaches, but as I understand it, there is no single 'silver bullet' that will rid us of MEV."
Twitter is also quite vocal about MEV, with some interesting rationale below:
https://twitter.com/angela_walch/status/1420946696666759168?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1420946696666759168%7Ctwgr%5E%7Ctwcon%5Es1_c10
- angela_walch
https://twitter.com/wsfoxley/status/1420969907714465794?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1420969907714465794%7Ctwgr%5E%7Ctwcon%5Es1_c10
- wsfoxley
https://twitter.com/AriDavidPaul/status/1420869988869677064?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1420869988869677064%7Ctwgr%5E%7Ctwcon%5Es1_c10
- AriDavidPaul
https://twitter.com/thegostep/status/1421013522918559745?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1421013522918559745%7Ctwgr%5E%7Ctwcon%5Es1_c10
- thegostep
