https://research.paradigm.xyz/MEV
Ethereum’s core insight was that flexible smart contracts allow developers to explore a new frontier of permissionless applications. The explosive growth of decentralized financial protocols built on Ethereum (“DeFi”) is a glimpse at what this innovation could enable in the future.
Like programming libraries in the first Internet revolution, DeFi’s “money legos” enable developers to build complex systems by composing and remixing simple building blocks. This complexity also brings novel risks. One of these risks is Miner Extractable Value, or MEV.
The concept of MEV was first introduced by Phil Daian in “Flash Boys 2.0,” and more recently popularized by my colleagues Dan Robinson, Georgios Konstantopoulos, and samczsun in “Ethereum is a Dark Forest” and “Escaping the Dark Forest.”
It has become a foundational concept in cryptoeconomics, but what actually is MEV? What are the implications for permissionless blockchains?
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.
Imagine there’s a $10,000 arbitrage opportunity available on Uniswap after a large trade has caused price slippage. An arbitrage bot notices the opportunity and submits a transaction to capture it, offering a $10 txfee to the miner. One of two things may happen:
The $10,000 potential profit is MEV. If a miner does not capture it, and a PGA is kicked off, the difference between the price at which the auction settles and the total MEV available is the winning trader’s profit (e.g., if a $7,000 fee is paid to a miner, the remaining $3,000 is left to the trader).
This example gives a high-resolution view of MEV, but it does not paint the whole picture. MEV is not just a curiosity. These little financial games create incentive ripples, a winding chain of cause and effect that must be followed to see the contagion. This post will explore that thread and explain why MEV may harm Ethereum and its users.
As a direct result of DeFi’s inflective success, the known lower bound of Ethereum MEV is growing at an exponential rate. At this pace, we believe that MEV could create meaningful issues within the next year.
It is impossible to say how much MEV is on Ethereum in total. All the MEV which we are currently aware of only constitues the lower bound.
This is because MEV can be created any time a user interacts with a blockchain, and smart contracts enable a functionally infinite number of potential interactions. Thus, it is computationally infeasible to calculate a blockchain’s total potential MEV by brute force.
However, we can establish a baseline by adding up the MEV that’s known to have been extracted (which is the “realized MEV” shown in the graph above). Then, we can use heuristics to infer how much higher than our baseline the true lower bound could be, and how the qualitative texture of the unexploited MEV could affect the blockchain’s environment.