What Is MEV, aka Maximal Extractable Value?

It is sometimes seen as an inevitable phenomenon and it is, to a certain extent. However, there have been some advances towards MEV management in the last years.

1. What is MEV?

MEV refer to maxi value can be extracted from block production in excess of standard block reward and gas fee through manipulation of transaction. It happens in the form of including, excluding or re-ordering transaction within block, or through generalised front-running.

You might think that validators are the only players who make profits capitalizing on MEV. But this is not the case. To understand that, let’s first review what the Mempool is.

When we send transactions through a wallet, our transactions are not immediately inserted into a block but rather sit in a pending transaction pool called the “Mempool”. These are transactions that are waiting to get validated and finalized (previously mined).

Inside the Mempool, there are many opportunities to make money. “Searchers” are independent network users who use algorithms to actively scour the Mempool for profitable MEV opportunities and then use bots to capitalize on them.

Some common techniques that searchers use to extract value from the everyday Ethereum user are for example: Sandwich Attacks, Reorgs, Just-in-time (JIT) Liquidity Attacks.

Why MEV is relevant?

Searchers compete against each other in order to extract as much MEV as possible. To win these fights, they need to incentivize validators to pick their transactions over those of their rivals by paying high gas fees.

The risk of centralization here arises from validators wanting to make more money. Since validators don’t perform computationally intensive work like miners did, they earn far less ETH in block rewards, making them more likely to seek out MEV opportunities.

Another issue stems from Ethereum requiring users to stake 32 ETH to become validators. This led to the formation of numerous staking pools running multiple validators. Those pools have amassed large amounts of resources that they can deploy to improve their MEV-extraction capability.

Small stakers can’t really compete against these large staking pools when it comes to capturing MEV; they are likely to join these pools to bolster their revenue, thereby reducing Ethereum’s decentralization.

Proposer-Builder Separation (PBS) is a potential solution for MEV attack where block construction and block proposing are assigned to different roles in the network. MEV-Boost is an implementation of PBS. We can break down block production process with MEV-Boost implemented.

There are three actors involved:

Searchers create bundles of profitable transactions and send them at once to a network of builders. The block builders gather transactions and bundles to build the most profitable blocks, the value of which comes from both MEV and transaction fees.

Builders then send their blocks to a relayer. A relayer is an entity responsible for checking blocks before passing them to validators. Relayer protects the validators from spam by confirming the builder blocks for validity and estimating the MEV-related value of each block.

You can think of the relayer as being involved with both block production and validation, a “middle-man” that eliminates trust assumptions between the builder and the proposer.

The relayer then sends only the header of the blocks to the validators. The validators cannot see the content of the blocks. They identify the most profitable header, sign the block, and send it back to the relayer to be propagated to the network.

It is important to stress that in this way, the validators can see the content of the block only after they have signed the block. Hence, the validator could not “steal” the MEV because he would have to sign another block, and in that case he would get slashed!

Block builders set their own address as the recipient of the fees accumulated in the proposed block, and they also include a transaction which pays ETH to the validator at the end of the block.

This Tweet shows that the use of MEV-Boost increased the staking rewards by 135%, check it out

There are some concerns around transaction censorship, as MEV-Boost does not permit building blocks that include Tornado Cash transactions (more precisely, every transaction must be OFAC compliant).

Alternatives and how the small investor can also profit from MEV. An interesting alternative to MEV-Boost are the products OpenMEV and SecureRPC (a relayer) by Manifold Finance.

Sushiswap will be the first partner of OpenMEV by creating “SushiGuard”, which aims to: