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What every trader should know about MEV — the MEV Crisis explained
In our last article we explored how mistX, using flashbots, bypasses placing transaction information into the Ethereum mempool and allows for private, priority transactions. In this article we will explore: MEV, what has been happening in the Ethereum mempool, why it is referred to as the Dark Forest and how this affects traders.
Defining MEV and the Actors involved
Miner extractable value (MEV) is a measure of the total value or profit available for extraction. MEV can be extracted permissionlessly by privileged protocol actors from the reordering, inclusion, or censoring of transactions within a block being produced on a blockchain. These privileged actors include miners, validators, and traders. MEV sometimes also refers to Maximum extractable value, as it isn’t always miners utilizing MEV.
Most of the activity is typically driven by DeFi traders using arbitrage bots to perform transactions on their behalf. The miners processing these transactions will indirectly profit from these traders transaction fees. Further, because of their authority to interact with a transaction, miners can also copy the same strategies they see DeFi traders using and use it for themselves.
For the sake of this article, we will classify all those who stand to make profit from exploiting MEV as ‘dishonest actors’. Most miners are honest actors, but some dishonest actors, (often non-miners) use the same process with bots to identify and process transactions into the blockchain that serve to directly profit themselves, at the expense of the user. To do so dishonest actors typically engage in a form of transaction attack, be that front-running, back-running, sandwiching transactions or otherwise.
The MEV Crisis
Users of the Ethereum blockchain pay a competitive rate in the form of gas fees in order to get their transaction included in a block. Miners have the authority to pick and choose which transactions they wish to include in the block. The obvious choice is for miners to include transactions with the highest gas fees by which they indirectly profit. Thereby Ethereum has created many profit opportunities such as liquidations and arbitrages.
Arbitrages, according to MEV-Explore, make up almost 98% of these profit opportunities. When you then factor that these strategies can be observed in the mempool, you can start to see why some dishonest actors have developed the tendency to prioritize self-serving transactions and beat legitimate traders and miners to the punch.
This tendency coupled with near unlimited arbitrage opportunities can potentially lead to incredibly high gas fees. This drastic rise in price ultimately intimidates many users from interacting with the Ethereum blockchain in light of heavy congestion; this is the MEV crisis. Overall the MEV crisis threatens the integrity of the Ethereum network, which is intended to be permissionless and fully decentralized. Flashbots as a means to protect against MEV serves to help democratize this issue and presents a solution to the MEV crisis.
So how is the MEV crisis playing out currently?
Just like a gold rush, miners are flocking to claim their profits from the Ethereum mempool. Similarly congestion may end up exhausting the opportunities through competition and thus continue to drive higher prices on gas fees. Particularly this impact becomes relevant in relation to dishonest actors who are often willing to outbid each other with higher and higher gas fees. This is done so that their transactions are more likely to get included in a priority position within the block. This is called priority gas auctions or ‘PGA’. Sandwich trades are multi-tx opportunities and are one of the primary examples of PGA. Sandwiching involves both front-running and back-running.
- 1.A dishonest actor detects a victim’s transaction and deducts there is profit to be made from the victims transaction
- 2.The dishonest actor places their transaction ahead of the victim’s transaction. This is front-running.
- 3.The victim suffers and ends up paying a higher price than expected.
- 4.Right after the victim’s transaction is complete, the dishonest actor sends another transaction to capture the profit. This is back-running and completes the sandwich attack.
An example of a dishonest actor profiting 0.06 ETH from a sandwich attack
Such arbitrage opportunities have become widely adopted, leading to inefficiencies such as network and blockspace congestion. One of the primary reasons for blockspace congestion is the large amount of failed transactions — many of which are failed MEV transactions. While many dishonest actors compete to get their transaction included, only one will emerge triumphant. The rest of the transactions should become distant memories but are instead recorded forever in the Ethereum blockchain.
The figure above shows gas usage from Extracted MEV to overall network gas usage from January 2020 until January 2021. Green represents successful MEV transactions and red represents failed MEV transactions. According to Flashbots research, failed MEV transaction gas fees could have filled at least 4500 blocks, demonstrating the inefficiencies that MEV produces.
We are currently seeing major economic impacts to users of the Ethereum blockchain. Users are starting to get priced out because they are unwilling or unable to pay the high gas fees that are caused by PGA. Users transactions are constantly at high risk of getting manipulated, sandwiched, and end up paying more than they bargained for.
MEV Extraction could also become centralized to a few players such as being limited to permissioned dark transaction pools that have access to signification hashrate, or through unilateral off-chain deals between large traders and miners. MEV could become an insiders’ game. This, again, is a threat to some of Ethereum’s core properties: permissionlessness and decentralization.
A Light in the Dark Forest
mistX.io shields users against these attacks by hiding transactions in bundles. Dishonest actors will have no way of front-running a user’s transactions because the transaction bundle always sits at the top of the block. Users similarly no longer have to fear being sandwiched.
mistX.io positively impacts the Ethereum blockchain because it promotes efficiency, reduces network congestion, and frees up blockspace by not including failed transactions in the block and not charging any gas fees for failed transactions.
Hopefully we have been able to give you more insight on how mistX.io helps users avoid the MEV crisis, and why we have developed this product. Be sure to use mistX.io to help navigate through the dark forest. If you need any extra illumination, check Sandwiched.wtf to see if you have been previously sandwiched. Now that you have learned about MEV, spread awareness and save a user from the dark forest.
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