The Battle of the MEV in Consensus PoW Blockchain
Learning Objectives
- What is Miner extractable value (MEV)?
- Who are miners?
- Who are searchers?
- What is Front running?
- Effect of MEV on transaction or memory pool (Mempool)
- What are Maximal extractable values (MEV)?
Introduction
In a proof-of-work consensus blockchain, the use of miners to approve transactions and add new blocks to the blockchain for an immutable record is an integral part of the decentralized blockchain protocol.
However, in recent times, there have been concerns about miners’ extraction and ability to front-run transactions based on the amount of the gas fees submitted by network users, and also how other network users known as searchers could significantly increase transactions fee so that their transactions will attract the attention of the miners.
These have led to an increase in proof-of-work blockchain scalability and transaction latency that affect throughput and finality.
Consequently, with the issue around miner-extractable value becoming significantly important due to bidding war and transaction throughput in a PoW consensus blockchain ecosystem, it’s important to simplify the impacts this has on transaction throughput and finality.
In a proof of work consensus blockchain, due to the small number of transactions per second (TPS) allowed by PoW consensus blockchain, transactions are not immediately added to the block but need to be confirmed before adding to a new block hash; hence, the transaction will remain in the waiting area, also known as txpool.
While a proposed block transaction by miners is waiting in the buffer zone, nodes will run a series of validity checks on these transactions to see if the transaction should be added to the network or rejected.
However, each node could configure its own rules for mempool and a node could be the first to receive a transaction and may not propagate the transaction to the rest of the network.
This process gives miners and searchers the ability to manipulate transactions by front-running other network users. Network users known as searchers can also use a complex algorithm bot to front-run other users by inflating the transaction fee submitted to the block to attract the interest of the miners and transactions with the highest fee will be approved while transactions with a lower gas fee will be sent to the bottom of the pool. Thus, miners control blockchain transaction inclusion, exclusion, and re-ordering transactions within the block they produce.
What is Miner extractable value (MEV)?
In an existing permissionless proof-of-work consensus blockchain, transactions in the pool or memory are ordered entirely at the discretion of network miners.
Miner extractable value (MEV) is a measure of the profit a miner, or validator, sequencer, etc.) can make through their ability to arbitrarily include, exclude, or re-order transactions within the blocks they produce.
MEV gives miners and searchers the ability to use complex algorithm bots to manipulate the ordering of their transactions to include or exclude within a block by changing the transaction fee they pay to block producers.
Who Are Miners?
Miners are the group of peer-2-peer node operators that confirm transactions on a proof-of-work consensus blockchain by solving complex computational mathematics for a block reward.
Miners get block reward incentives based on the number of transactions they honestly add to the block. All honest nodes append and add the same transaction record and timestamp locally. However, all nodes on a state machine operate synchronously by sharing a global clock and timestamp.
Who Are Searchers?
Searchers are network users who broadcast the transaction to the blockchain using a complex algorithmic bot to detect profitable miner extractable value opportunities.
In a proof-of-work consensus blockchain, transaction order can also be manipulated by network users known as searchers as a function of the network fees they pay running complex algorithms on blockchain data to detect profitable miner extractable value opportunities and have bots to automatically submit those profitable transactions to the network.
What is Front Running?
Frontrunning is a technique used by network searchers and miners alike to generate additional profit where a transaction with a higher gas fee is broadcasted to the network by the searcher so that miners would pick the transaction with the highest gas fee over others and send a transaction with a lower gas fee to the bottom of the transaction pool.
Consequently, front running occurs when miners prioritize making a profit by re-arranging specific transactions right before the users, leading to the failure of the user transaction while the miner’s transaction is successful and profitable.
This occurs because miners possess the ability to reorganize, include and exclude transactions at their own will, using their position of privileged information to execute a trade first by taking advantage of the trading opportunities the user’s transactions signal.
The proliferation of the concept of front-running in a proof-of-work blockchain is the realization of the systemic configuration of the PoW blockchain by network users (searchers) and node operators (miners) using complex algorithms redesigning transaction mempools.
Furthermore, another miner extractable value technique employed by miners is called back-running, where miners take advantage of how the execution of the users’ transactions will affect market conditions and place their specific transaction right after the users.
What is the Effect of MEV on Transactions or Memory Pool (Mempool)?
In a proof-of-work consensus blockchain, miner extractable value has contributed to high gas fees, network scalability latency, delayed transaction finality, and throughput. Miner extractable value affects transaction and market conditions using the front running and back-running mechanism.
Searchers and miners contribute equally to the issue of scalability faced by proof-of-work blockchains such as Ethereum, Bitcoins, Monero, and Zcash.
Consequently, as witnessed during the Bored Ape Yacht Club (BAYC) “Otherside” metaverse virtual land sales on the Ethereum network, which generated the highest gas fee in the history of Ethereum, where investors paid $176 million on fees alone in the 24 hours. Users embarked on a bidding war during minting, which increased slippage and gas fees.
These led to a lot of failed transactions in bidding warwhere searchers and miners front-run others to purchase the virtual land first. This causes a lot of scalability and network congestion which increases gas fees astronomically.
The establishment of miner extractable value (MEV) has provided dualistic effect and utility to proof-of-work blockchains in both good and bad ways.
The good use of MEV is in enforcing blockchain security and decentralization because of the peer-2-peer distributed ledger technology used by blockchain to be decentralized nodes operation around the world and the ability to prevent Sybil and 51% attacks.
However, another direct effect of miner extractable value includes but is not limited to DEX arbitrage, NFT MEV, and sandwich attack, which is a combination of front-running and back-running by searcher and miner to specifically make a profit and take advantage of the users’ submitted transaction
· Sandwich
Another common method of miner extractable value extraction is the technique of sandwich trading. To sandwich a trade in a proof-of-work blockchain, a searcher will watch the mempool using an algorithm for large, decentralized exchange trades.
For instance, suppose someone wants to buy 10,000 SOL with DAI on Uniswap. A trade of this magnitude will have a meaningful effect on the SOL/DAI pair, potentially raising the price of SOL significantly relative to DAI, which will affect market conditions.
· DEX Arbitrage
In the recent event of Terra Luna, chainlink oracle was reported to stop updating price action, which led to a lot of people taking advantage of arbitrage from the low-priced decentralized exchange and sell-off at the high-priced decentralized exchange.
Decentralized exchange (DEX) arbitrage is the simplest and most well-known miner extractable value opportunity. As a result, it is also the most competitive. It works like this: if two DEXes are offering a token at two different prices, someone can buy the token on the lower-priced decentralized exchange and sell it on the higher-priced decentralized exchange in a single, atomic transaction. Thanks to the mechanics of the blockchain, this is true, riskless arbitrage.
· NFT MEV
The emerging non-fungible token is already experiencing miner extractable value during blue-chip NFT mint. As explained by the Ethereum blog
In the NFT space is an emergent phenomenon and isn’t necessarily profitable. However, since NFT transactions happen on the same blockchain shared by all other Ethereum transactions, searchers can use similar techniques as those used in traditional mining to extract valuable opportunities in the NFT market too. For example, if there’s a popular NFT drop and a searcher wants a certain NFT or set of NFTs, they can program a transaction such that they are the first in line to buy the NFT, or they can buy the entire set of NFTs in a single transaction. Or if an NFT is mistakenly listed at a low price, a searcher can front-run other purchasers and snap it up for cheap using a flash bot.
What Are Maximal Extractable Values (MEV)?
As explained by the Ethereum blog, Maximal extractable value is the replacement for miner extractable values since the migration of Ethereum from proof of work to proof of stake through the concept of merge, where the miner will be replaced by validator/delegate.
Maximal extractable value (MEV) refers to the maximum value that can be extracted from block production more than the standard block reward and gas fees by including, excluding, and changing the order of transactions in a block.
Consequently, maximal extractable values are the new application on the Ethereum merge proof-of-stake consensus blockchain where miners will be replaced by validators. The proposed move from PoW to PoS by Ethereum will solve the inherent scalability bottleneck by increasing the total transfer per second (TPS) on the network, thereby reducing the front and back-running issues by network miners.
Proof-of-work Consensus Blockchain and its MEV Implications
Programmable blockchain can be divided into multiple layers, the application layer, and the protocol layer. On the protocol layer, the blockchain allows various applications to be built on the protocol. For example, Ethereum is considered the biggest programmable blockchain due to the number of decentralized applications (Dapp) built on the protocol.
Consequently, miner extractable value opportunities happen both on the protocol and at the application layer of the consensus blockchain as acknowledged by the Ethereum network foundation.
Some forms of miner extractable value, like sandwich trading, results in an unequivocally worse experience for users. Users who are sandwiched face increased slippage and worse execution on their trades.
As stated on the Ethereum blog that tt the protocol layer
Generalized frontrunners, back running, and the gas-price auctions they often engage in (when two or more frontrunners compete for their transaction to be included in the next block by progressively raising their own transactions’ gas price) result in network congestion and high gas prices for everyone else trying to run regular transactions.
Beyond what’s happening within blocks, miner extractable values can have adverse effects on different aspects of the blocks, which include failed transactions, delay in transactional finality, and high transaction fees.
If the miner extractable value available in a block significantly exceeds the standard block reward and the incentives, miners may be incentivized to remain in blocks and capture the MEV for themselves, causing blockchain re-organization and consensus instability.
Conclusion
The adverse effects of miner extractable value on the blockchain have impacted how transactions are approved and confirmed significantly on a proof-of-work consensus blockchain, which has resulted in slow transaction throughput, blockchain scalability, and finality.
Consequently, network users who run regular transactions are left with the residual effect of miner-extractable values, which increase transaction finality time and congestion of the network.
In a proof-of-work consensus blockchain, miners and searchers are profiting from the network by front-running or back-running transactions.
Thus, if the miner-extractable value continues, it will result in consistent network congestion, scalability latency, and more expensive transaction slippage. However, layer-2 protocols are using zero-knowledge proof to perform batch transactions in an attempt to minimize the effect of miner-extractable values on transactions throughput, and the migration from PoW to PoS by the Ethereum network will also reduce the ability of miners to front-run a transaction. However, there will be a new MEV on the PoS consensus blockchain known as a Maximal extractable value, which is based on the staked asset to validate a transaction on the network.
Furthermore, with the introduction of Fair Sequencing Services (FSS) by chainlink using decentralized oracle networks (DON), the issue of miner extractable value is a step closer to being resolved.
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