- MEV is a complex problem for blockchains and mainly for Ethereum.
- We have listed the top 2 techniques to extract the MEV.
In simple terms, Maximal Estractable Value (MEV) refers to the maximum value which can be extracted by producing the block by excluding the standard block reward and the gas fees and changing the order of the transaction of the block. In this article, we will understand in detail what this is and some techniques that can be used to generate it so that the miners can gain the maximum value.
Some people refer to this term as an invisible tax that the miners collect from the participants of the crypto ecosystem. This thing can be easily done by reordering and manipulating the transactions in the blockchain. Let’s first know from where the word MEV originated.
In 2019, Phil Daian and a team of researchers wrote a paper on smart contracts. They named this paper “Flash Boyz 2.0”. And in this paper, they coined the term called “miner extractable value”. So this was all about how this term originated. Now let’s move to our main topic, how this thing works.
How Does MEV Work
So as we have earlier discussed that the miners receive MEV. So theoretically, the miners should receive the entire MEV available from traction that may take place on the blockchain. But as technology is rising, nowadays, searchers use bots. These bots detect the MEV opportunities, and they automate the extraction process. Despite this, miners are not entirely disadvantaged, as they still receive gas fees from these transactions for block validation.
Techniques to Extract MEV
Many techniques can be used to extract MEV, but in this article, we’ll focus on the two most accessible and reliable methods.
Liquidation
In the decentralized ecosystem, cryptocurrency owners often use their assets as collateral to access funds for other investments. Platforms offer opportunities for users to take loans for trading, but losses in trading are common. Let’s take an example in which a user takes a loan for trading, and in trading, losses are very common. If the user suffers a loss, then they will not be able to recover their collateral.
In this condition, the protocol allows all the participants to participate in a chance to liquidate the collateral, and in these conditions, they get the opportunity to get the liquidation fees from the borrower. In such circumstances, many people search for MEV and find borrowers primed for liquidation so that they can gain the liquidation fees for themselves.
Front Running
There is a famous bot in the market which is called the front runner. It involves the use of specialized bots that scan the mempool for profitable transactions. When such a transaction is detected, the bot replicates the original transaction with higher gas fees to incentivize miners to prioritize it over the original one. This technique enables front runners to gain an advantage by essentially “jumping the queue” and reaping the rewards.
Miner Extractable Value remains a complex aspect of blockchain systems, particularly Ethereum. As technology and techniques evolve, the extraction of MEV continues to impact the crypto ecosystem. Understanding the concept and the techniques used to extract MEV allows miners to navigate this landscape and maximize their earnings.
