A new research paper published by the Bank for International Settlements has equated miner extractable value (MEV) to illegal activities in traditional markets like front-running and sandwich trades.
MEV refers to profits that miners can earn by choosing which transactions to include in a block and in which order. The report deems MEV to be:
“[P]rofits that are made by manipulating market prices via a specific ordering — or even censoring — of pending transactions.”
In the traditional financial market, transactions are sequenced in the order that they are received, the report said. However, in the case of blockchains, miners determine which transactions to add to a block, and these miners are free to pick and choose from all the pending transactions in the memory pool or mempool.
Therefore, instead of choosing transactions based on transaction fees, where the transactions with the highest fees are added first, miners can select transactions based on the “profit opportunities they generate.”
For instance, a miner can introduce their own transaction before a large pending transaction that could impact prices, thereby earning a profit, the report explains. In other words, if miners see a large pending transaction that could affect the price of the asset, they could choose to add their own transaction. This will enable the miner to earn a profit because they have prior information about how prices will be affected, thanks to the pending transaction in the mempool.
The report stated:
“Not only does this profit come at the expense of other market participants, but the miner’s transactions also delay other legitimate transactions. It thus forms an “invisible tax” on regular market participants.”
Similarly, miners can also engage in “back-running,” the report claimed. This means that a miner can place a buy or sell order immediately after a large transaction or market-moving…
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