Balancer Protocol
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Balancer Protocol

What Is Miner Extractable Value?

Miner Extractable Value (MEV) is a phenomenon costly to trades. Let’s go over MEV and how it affects the average trader’s activities.

How Does MEV Work?

When a new block is created, several things must happen. First, there is the mining process, based on proof-of-work, where nodes on the network record information on the blockchain.

MEV Techniques (Miners)

Front Running

A tactic first seen in traditional finance, front running the practice of closely monitoring and getting in front of a trade right as the price rises or drops.

Back Running

On the opposite end, back running is the MEV strategy of placing a transaction directly after a transaction that would benefit the user. An example of this is a liquidation transaction immediately following an oracle price update. If a miner is aware of a transaction with a significant price impact, they will place their transaction in the same block as the target transaction.

Sandwiching

Sandwiching is another sequential strategy. As the name suggests, a miner places a transaction in front of a user, making the token price go up and increasing slippage costs.

More MEV Opportunities

Decentralized Exchanges

Decentralized exchange arbitrage presents a simple MEV opportunity called “DEX arbitrage” or “cross-exchange arbitrage.”

Liquidation

Liquidation in lending protocols is another opportunity for MEV.

Consensus Protocol

Before moving on, it’s worth noting that the Ethereum blockchain is phasing out proof-of-work (PoW) in favor of proof-of-stake (PoS) as mining comes to an end. Ethereum 2.0 is on the horizon. The consensus shifts from miners to block producers and increases MEV incentives.

MEV Impact

Unfortunately, many of the side effects of these practices are negative. For the average user, MEV front-running and sandwiching lead to negative executions on transactions and increased slippage.

The Bottom Line

MEV affects trading activities at all levels resulting in either failed transactions or transactions executed at a higher cost than expected.

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Balancer Labs

Balancer Labs contributes to Balancer Protocol — the leading platform for programmable liquidity.