MEV 101: Extracting Profit from Cryptocurrency Blocks
MEV used to stand for Miner Extractable Value, but it evolved into Maximal Extractable Value once it started to spread in Proof of Stake networks, where validators manage block validation instead of miners. It is defined as the value validators can extract by reorganizing transactions while validating a block.
MEV is created when multiple transactions are trying to be included in the same block, but only a limited number of transactions can fit. In this situation, miners/validators can choose which transactions to include in the block based on maximizing their own benefit.
MEV can be generated by selecting transactions with higher fees, as they will receive those fees as part of the block reward for creating the block. But it can also be extracted through other techniques where validators will perform more complex operations. One example is “frontrunning”, where a miner can observe a pending transaction and then quickly create a block that includes a similar transaction with a higher fee, effectively “jumping the queue” and earning a higher fee for their own transaction. Other forms of MEV with fancy names are “sandwiching” or “uncle bandit.” They all involve highly technical, high-speed operations to reap profits from block org.
If you need a brief explanation of how transactions work under the hood, read the following post 👇
In other words, think of all the ways you could profit if you were the doorman guarding the gates of a mall on a Black Friday and had a queue of very anxious people. That’s MEV.
MEV used to be considered a force of evil. Tips, bribes, and arbitrage are not the most popular business models, but if you’ve spent enough time in crypto, you’ve already seen the positive externalities they imply.
But the perception of MEV has evolved as companies like Flashbots have worked to professionalize it, enable fair MEV extraction software to validators, provide MEV protection to users, and focus on the value extraction that’s non-harmful to the ecosystem.
Currently, the healthy version of MEV is understood as an extra source of revenue in the blockspace market. Many projects, for example in the Cosmos ecosystem, are trying to embrace positive MEV and include it as another cog in the machine.
