Catalogue - Key Takeaways Show
Maximal Extractable Value (MEV) is a new concept in cryptocurrencies. But at the same time, it is gaining much attention. MEV refers to the maximum value that a miner can extract from the given set of transactions of a blockchain network. In this article, we will understand the deeper concepts of MEV and its potential impact on the cryptocurrency space.
What is MEV?
MEV is the total amount and value that the miners can extract from the transactions by reordering, excluding, and including specific transactions in the block. Miners can use their control to decide which transactions should be included in the block to extract some additional value above the block reward and the required transaction fees. This also includes activities such as frontrunning, sandwich attacks and arbitrage.
What is Frontrunning?
Frontrunning takes place when the miner anticipates that a bigger transaction will happen on the network and thus includes a similar transaction in their own block. This happens before the original transaction is going to take place and thus allows the miner to profit from the price movements that the large transactions would occur in the market.
What is Sandwich Attack?
Sandwich attacks occur when the miner sees when a bigger transaction is targeted, and the miner throws two transactions to profit from the resulting price movement.
What is Arbitrage?
Arbitrage involves the exploitation of price differences between exchanges. Many times, people profit from small price discrepancies and buy low from one exchange and sell on another at higher price.
MEV and Decentralised Finance (DeFi)
MEV has become popular and increasingly relevant with the rise of decentralised finance (DeFi) applications (DApps) built on blockchain networks. These applications are built on the blockchain network and thus use smart contracts that execute transactions instantaneously without involving intermediaries. This creates an environment for the miners so they can extract additional value by manipulating the transaction order and only including specific transactions in the block.
Impact of MEV on Cryptocurrencies
Impact of MEV on crypto market is multi-faceted and quite complex. On one hand, MEV is incentivizing miners to process transactions in an efficient manner and improve overall performance of network. On the other side, it can create a situation where the miner has too much authority to extract value at the expense of other users and their order amounts. MEV thus creates a barrier for small participants who have no access to such resources and expertise to extract value like other big miners and investors.
What is the Solution?
To solve the market manipulation that miners bring several solutions have been placed fourth in the crypto community. One such solution is the development of MEV-free protocols which minimize the ability of miners to extract additional value. Thus, transaction ordering becomes more deterministic and reduces the potential of manipulation. The second approach is to develop tools and strategies that allow users to extract MEV themselves and not rely on miners. This could include creating decentralized MEV extractors that allow users to benefit from the value of transactions directly.
Moreover, MEV has broad implications on the cryptocurrency market. It can create situations where certain coins and tokens will only be utilized for their storage of value. Such crypto assets can be used for MEV solely. This can lead to the concentration of power in the hands of the miners and token holders, giving way to insider trading and a reduction in the overall market diversity of the system.
Conclusion
In short, MEV is a concept that is not fruitful for the crypto market overall. On the one hand, this gives way to the concentration of wealth and gives the other market players and investors a major disadvantage. MEV is currently a key area of concern for the crypto community and unless a solid solution is put on the table to cater to this emerging problem.
FAQs
What is Miner Extractable Value?
Miner extractable value is the previous name for Maximal Extractable Value (MEV). MEV refers to the profit that miners get from ordering and including transactions in blocks. It allows them to prioritize, time and exploit transaction dependencies. MEV offers opportunities and challenges prompting research for solutions. Managing MEV is important for decentralised systems or decentralized finance (DeFi).
What is MEV Searcher?
MEV searchers are independent network participants that extract a large portion of MEV by running complex algorithms on blockchain data structures. It helps them identify lucrative MEV possibilities and set up bots to submit such profitable transactions to the network automatically.
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