MEV

As discussed previously, cryptocurrencies are secured by miners (or “validators” for Proof-of-Stake systems), who gather transactions, verify them and include them in the next block.

Because each block can only contain a limited number of transactions, miners generally choose which transactions to include based on an auction process – those who offer to pay the highest fees will be included first.

Unfortunately, miners aren’t technically forced to follow this rule and ultimately have full discretion over which transactions to include, which to ignore and how to order them. When miners abuse this power to personally profit, it’s known as Miner-Extractable Value (MEV).

There are a host of MEV tactics, but a common one is known as frontrunning. To see how this works, let’s imagine that you noticed that ETH was trading for a lower price on exchange A than it was on exchange B. Seeing a great arbitrage opportunity, you put in an order to buy ETH on exchange A and then sell it on B. Once you place the order, it gets sent to the miners who put it in a transaction queue.

Once this transaction is in the queue an unethical miner could now see what you are trying to do and decide to ignore your request and make the same trade himself, stealing your profit opportunity in the process.

As mentioned, there are several of MEV tactics and, to make matters worse, many of them are now employed by automated bots. As such, MEV is becoming a substantial problem that is estimated to cost users over $1 billion annually.