What is MEV: A Beginner’s Guide to Ethereum’s Invisible Tax
With the increasing proliferation of DeFi (decentralized finance) protocols, it is essential to comprehend the effects they have on the network or the financial structure. MEV (miner extractable value) is an increasingly complex term that is becoming more prevalent and has been sustained as a money-maker for miners. It is an issue that addresses the potential for miners to exploit their proprietary and exclusive operations. This guide introduces the concept of MEV, showcases the potential effects of MEV, and highlights the different debates surrounding MEV.
What is MEV?
MEV (Miner Extractable Value) is the potential to extract rewards from a variety of exploits by miners. MEV is a consequence of a failure on behalf of the blockchain, as miners are essentially presented with the ability to collect rewards that do not require creating value through their work. The term MEV captures those rewards that miners can extract from the network or by exploiting gas or transaction fees. Think of MEV as a tax imposed on market participants by miners.
In a streamlined summary, MEV is essentially a money-making loophole for miners. Instead of actually having to do the work, such as mining cryptocurrency blocks, low-cost miners may resort to exploiting MEV in order to extract more rewards. It has the potential to set off a standoffish atmosphere where pool operators, who actually create value for the network, don’t have access to blockchain opportunities as often as miners who exploit these loopholes.
MEV Exploits
Due to miners’ understanding of the network or the way that transactions work, they stand to benefit from aggressive transaction reordering (which is ultimately cheating the system, by using their access to try and get the most value out of their transactions).
A key example is the front-running technique, where a privileged party, such as a miner, takes advantage of an opportunity by taking a transaction before another user. For example, a miner will intercept the transaction first and complete it before the other user. This technique presents the miner with the opportunity to buy something at a lower price and then sell it for a higher price, maximizing profits.
Capping MEV
MEV is a consequence of the code that cryptocurrency networks are built on, and it has resulted in a swell of debates attempting to find a solution to the issue at hand. One of the methods that has gained traction is the introduction of a MEV cap. The logic is if miners are best incentivized to conduct the most efficient operations, introducing a cap on the income they are able to gain from MEV exploits should encourage miners to run their operations in the most efficient manner possible.
Keeping it in perspective, discussions have been made on capping the MEV income to 0.9-1.0% of a miner’s income. This would not have enough of an effect to harm miners, but it would be enough to acknowledge that miners have exceeded any necessary MEV limits. Additionally, such capping would incentivize miners to run their operations in a more efficient manner, since they can expect only a certain percentage of their income to come from MEV.
Overall, such a cap would increase transparency in the network and subsequently give users a better understanding of the entire chain.
The Debate Surrounding MEV
Arguably, the greater debate is whether or not MEV should be a cap or a fee. This debate is irrelevant given the current state of affairs – miners are still able to take advantage of MEV opportunities and use them for more profits.
The debate spans a range of positions, including those who have argued for a flat fee or a sliding scale fee—where miners can earn more by executing MEV trades or performing work that is beneficial to the network. Nevertheless, both sides have been unable to come to an agreement yet.
In general, the debate highlights the problem of the unequal access to MEV opportunities, particularly between large miners and small miners. This means that large miners have an unfair advantage and will always be the ones to reap in the most MEV rewards, thus further benefitting their operations.
MEV has the potential to be a great way to incentivize miners to be more efficient, yet still generate more profits for their efforts. The introduction of output capping and fees could provide a better understanding of the entire chain and it would level the playing field for small miners. Overall, MEV can be seen as a tax which offers an opportunity for miners to create more financial value and generate more profits, while still being mindful of the unwarranted exploitation of the network.
