What Is MEV and How Does It Impact Your Blockchain Transactions

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In the early days of Bitcoin, miners could receive rewards for either mining a block or as commissions for a transaction with the highest gas price.

The logic behind forming a block was relatively simple – get all the valid unmined transactions from the mempool, sort them according to their gas price, form them into a block and then begin mining.

In time, as blockchain got more and more advanced, we witnessed the development of Turing-complete smart contracts on Ethereum and then the whirlwind of DeFi growth.

With all that, block producers received additional methods of turning profit.

It turned out that by including, excluding and rearranging the order of transactions, block producers could now earn additional rewards.

This mechanism was called MEV (maximal extractable value) – the biggest sum that block producers could earn.

The history of MEV

Even before Ethereum’s mainnet release, discussions regarding gaining additional profit began showing up online.

Users have discovered that the public decentralized nature of blockchain allows ‘sneaking’ a smaller transaction in front of a large one, so anyone can easily purchase assets at a lower price.

Because a larger purchase increases the asset’s value on decentralized exchanges, an earlier transaction can prove profitable, since the assets have been obtained prior to growth.

The term ‘MEV’ was coined in 2019 after the research Flash Boys 2.0 was published. It was the first comprehensive research on the matter which provided a detailed look into the issue.

How does it work

Usually, miners, validators or block producers have the authority to include, exclude and rearrange certain transactions.

Imagine a scenario – you see an opportunity to earn money on a protocol. You realize that the opportunity has been available to everyone for a while, yet it hasn’t been exploited.

So, you prepare a transaction, send it and eagerly await its mining to receive the desired reward.

However, it turns out someone jumps right ahead of you with a similar transaction and steals the reward for themselves from under your nose.

It’s only reasonable to wonder what are the chances of two people simultaneously finding the same opportunity.

Pretty low, and to make matters worse, no one had been looking – there are programs and tools that automatically analyze the submitted transactions and then modify the ones that can prove profitable for the benefit of their…