What is maximal extractable value (MEV)?

Maximal extractable value or MEV within the cryptocurrency industry refers to the maximum profit a miner or validator can extract when processing a new block. By including, excluding, and changing the order of transactions in a block, it may be possible for a miner or validator to earn more than the standard block reward and gas fees.

MEV is typically associated with blockchain networks like Ethereum, which tend to see more complex transactions that offer a greater chance of squeezing out additional profit — or extracting maximum value. In this guide, we’ll explain MEV and how it works in more detail. We’ll also cover some examples of MEV, and look at its pros and cons.

History of MEV

The term MEV dates back to a 2019 research paper titled ‘Flash Boys 2.0,’ which was written by Philip Daian, Steven Goldfeder, and others. In it, the group outlined the emergence of MEV and how it poses a ‘realistic threat’ to blockchain networks. At the time, MEV was mostly associated with Ethereum, which was using the proof-of-work (PoW) consensus algorithm.

Since then, Ethereum has executed ‘The Merge’, in which it switched from PoW to the proof-of-stake (PoS) consensus algorithm. PoS uses validators rather than miners to process new blocks, but they still have similar powers of transaction inclusion, exclusion, and ordering. Therefore, MEV did not disappear when the Ethereum network underwent this change.

MEV is not exclusive to Ethereum, but given that Ethereum is by far the largest and most popular blockchain for decentralized finance, it tends to be the network of choice for validators looking to take advantage of MEV and earn as much money as possible.

How does MEV work?

As we touched on above, many blockchain networks rely on miners or validators to process new blocks filled with cryptocurrency transactions, then add them to the blockchain database. This gives miners and validators control over transaction inclusion, exclusion, and ordering — allowing them to decide which transactions are included in a block, and in which order.

Each of those transactions has a gas fee or transaction fee attached, which varies depending on the size of the transaction — or the amount of cryptocurrency being sent — and how busy the network is when the transaction is submitted. During times of congestion, network users will often be forced to increase their gas fees in order to get their transactions processed quicker.

Most miners will prioritize transactions with higher gas fees because it means they earn more for their work. However, there is no rule that says these transactions must be picked first. By carefully selecting which transactions to include, and in which order, miners can open up other, more lucrative profit-making opportunities related to things like arbitrage and liquidation.

Miners and validators aren’t the only ones who may benefit from MEV. In fact, they will often collaborate with ‘searchers’ — those who analyze network data specifically to identify profitable MEV opportunities. Searchers will pay excessive fees, sometimes as much as 99.99% of their profit, to miners and validators to ensure that their transactions are executed at the right time.

Examples of MEV

How MEV works in detail depends on the method a miner or validator uses to take advantage of it. So, let’s take a look at some of the biggest and most common examples of MEV.

Arbitrage
Arbitrage is one of the simplest and most common opportunities for capitalizing on MEV. When using this method, arbitrage traders check prices on different decentralized exchanges (DEXs) to find discrepancies in cryptocurrency values. They will then buy a token from an exchange offering it at a lower price, then sell it on an exchange offering it at a higher price.

This all happens in a single transaction, making it a riskless arbitrage trade. MEV occurs when a miner or validator (or searcher) identifies this transaction while it is pending, then places their own transaction ahead of it to claim the difference that arbitrage trade offered as a profit.

Frontrunning
Similar to the method above, frontrunning is when miners or validors identify a large buy order on a decentralized exchange, then place their own large buy order ahead of it. This allows them to acquire assets at their current price, known for sure that their value will increase almost immediately. They can then offload those assets and collect their profit.

Frontrunning also takes place in DeFi sandwich attacks, in which both frontrunning and backrunning transactions are placed to take advantage of the value fluctuations that will occur following certain trades.

Liquidations
DeFi lending protocols allow users to take out loans using their cryptocurrencies as collateral. If the value of that collateral drops below a certain threshold, their position can be liquidated, and then the borrower must pay a liquidation fee, which can be significant, to the liquidator. Miners and validators seek out these opportunities, then ensure they place the liquidation transaction.

Pros and cons of MEV

The biggest advantage to MEV, as you might have realized already, is that it gives miners, validators, and searchers the opportunity to maximize their profits. Although many blockchain users would frown upon this practice, it is not illegal and it does not break any rules. Some may argue that it actually benefits the ecosystem in the end by highlighting potential inefficiencies.

For instance, those using arbitrage to take advantage of MEV actually trigger swift price corrections across decentralized exchanges. The fact that DeFi liquidations can be used to take advantage of MEV is something many borrowers are aware of, and those who don’t want to be caught out will pay back their lenders as quickly as possible.

Of course, there are some big disadvantages to MEV, too. Strategies like frontrunning and DeFi sandwich attacks harm unsuspecting users who end up having to overpay on their trades, while activity from MEV searchers often leads to congested blockchain networks and higher gas prices as they compete to ensure their transactions are executed at the right time.

As a result of these negative impacts, the blockchain industry has long been fighting to tackle MEV and eliminate it altogether.

Maximal extractable value vs. miner extractable value

If you’ve come across the term ‘miner extractable value’ before, you might be wondering how it differs from maximal extractable value. In actual fact, it doesn’t differ at all. Miner extractable value was the original name for MEV, which was coined when Ethereum relied on miners for its proof-of-work (PoW) consensus mechanism.

These days, MEV is more prevalent in proof-of-stake (PoS) systems — thanks to Ethereum’s switch — so the term was adjusted to maximal extractable value instead, acknowledging the fact that it’s not only miners who can profit from MEV.

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