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MEV Explained: The Invisible Force Driving Ethereum!

by Adam BoudjemaaNovember 16th, 2023

Too Long; Didn't Read

Ethernet's'mempool' and 'Maximal Extractable Value' (MEV) are key to the system. MEV is a way for miners and validators to earn extra money. It can also slow down the entire system and make transactions more costly.

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Have you ever wondered why your Ethereum transactions take time or cost more than expected? The answer lies in two mysterious terms: 'mempool' and 'MEV'. Unpack the secrets behind these crucial blockchain elements and discover how they influence every Ethereum transaction you make.

What is a Mempool?

The mempool, short for 'memory pool'’ is like the transaction waiting room. When you send a transaction, it joins a queue. All transactions are visible to the network's validators, previously known as miners. These validators choose which transactions to verify and add to the next block in the blockchain, making them crucial gatekeepers in the process.

The competition for MEV, or Maximal Extractable Value, begins in this selection arena.

Think of it as a bus station where each transaction is a passenger waiting to board. The blockchain block is the bus, ready to depart on its travel, and the validators are the drivers deciding who gets on. Your transaction is patiently waiting its turn.

For a fun and interactive way to understand the concept of mempools, I highly recommend visiting the TxStreet. It visualizes it in a way that's both engaging and easy to understand.

How Does MEV Work?

Originally, MEV stood for Miner Extractable Value, highlighting the extra profits miners in a Proof-of-Work (PoW) could earn.

However, with Ethereum's transition to Proof-of-Stake (PoS) in the Merge, this concept evolved to Maximal Extractable Value. This change reflects the shift in responsibility from miners to validators for confirming transactions.

Miners and validators have several strategies for MEV:

DEX Arbitrage: They buy a cryptocurrency at a lower price on one exchange and sell it at a higher price on another.

Anecdote: A trader once made $20,000 in a day by exploiting price differences in Ethereum across exchanges!
Liquidation Opportunities: Miners can liquidate collateral from unpaid crypto loans.
Front Running: Seeing a large incoming order, miners can place their own order first, benefiting from the anticipated price change.

Example: It’s akin to buying apples before someone else in the market does to sell back at a higher price.
Sandwich Attack: This involves placing orders before and after a large trade to profit from the resultant price shift.

Fact: Sandwich attacks are frequent; one platform recorded about 25,000 such trades in a single month.

The Double-Edged Sword of MEV

MEV, or Maximal Extractable Value, has its ups and downs. On one side, it motivates miners and validators to work harder, which helps keep the Ethereum blockchain running smoothly. But on the flip side, MEV can lead to unfair situations for average users. It can also slow down the entire system and make transactions more costly.

Did you know? There was a time when so many miners were busy with MEV strategies that it made Ethereum painfully slow for regular users.

Tackling MEV Risks

To combat MEV risks, many users turn to tools like Flashbots. This service helps hide transactions from the public mempool, making them less visible to those seeking to exploit MEV. It's like choosing a hidden path to avoid the crowded main roads of transaction traffic.

Interesting Fact: MEV Blocker detected validators exploiting DEX users through front-running, affecting about $1.3 billion in transactions.

The Future of MEV

Ethereum's evolution, with updates like 'EIP-1559' and the shift to Proof of Stake, aims to curb MEV's negative aspects. These changes are designed to make the system fairer and more secure. One proposed method for MEV Smoothing suggests that committees confirm new blocks, distributing rewards more evenly among members, including the block proposer.

Conclusion

In summary, the mempool and MEV are pivotal elements of Ethereum. While MEV presents opportunities and challenges, ongoing innovations and updates like EIP-1559 and the move to Proof of Stake are steps towards addressing its complexities. As Ethereum continues to evolve, understanding these concepts remains crucial for anyone navigating the cryptocurrency landscape.

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