What Is MEV?

MEV, short for Maximal Extractable Value, refers to the additional value a miner or validator may capture when confirming a block. This occurs by changing how transactions are confirmed in that block, by reordering the transaction queue, or by including or excluding certain transactions from the block. This strategy is made possible as many popular blockchain protocols, both proof-of-work and proof-of-stake, allow anyone to see unconfirmed transactions awaiting in the mempool (the blockchain’s pool of pending transactions), and capitalize on them as they see fit. 

By monitoring MEV opportunities, network validators are sometimes able to capture additional rewards. However, the same potential can also cause degradations to user experience in some cases, as transactions have the potential to be ignored by validators/miners if it is not considered profitable enough.         

How Is MEV Used?

MEV can be pursued by validators/miners, and automated bots to find profitable opportunities made possible by the public visibility of pending transactions. When a more profitable opportunity is detected, validators will either insert a transaction just before a profitable trade (known as front-running) or just after one (known as back-running), in order to make the block’s validation yield greater rewards. 

Another strategy is something called sandwiching, which involves placing a transaction before and after transaction in order to profit from the price slippage. These strategies are often made possible by offering very high transaction fees in order to have their transactions prioritized by the network. However, validators can also seek MEV opportunities through dedicated protocols such as MEV-Boost. 

However, while MEV strategies can generate additional revenue for validators , many would argue that it makes using the protocol less fair. If a user’s transaction is deemed less profitable to be processed, MEV strategies could result in the transaction being skipped by validators, or the required transaction fee becoming much higher. MEV has nonetheless become a significant factor in blockchain operation and design.

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Why MEV Matters

Despite concerns around fairness, MEV plays a role in shaping validator incentives and functionality of blockchain networks. As a network user, MEV can cause their transactions to become delayed, more costly, or subject to failed execution. For blockchain developers, dApps that involve swapping and lending must take MEV principles into account to ensure a positive user experience and maintain system fairness. 

Some projects, such as Flashbots, have been created with the purpose of ensuring that MEV does not have a negative impact on protocol behaviour. They allow builders to take advantage of MEV through innovative techniques, while the user experiences minimal disruption to their  blockchain activity. As blockchain systems continue to grow in adoption and scope, maximal extractable value will continue to be an important area of development, and will contribute to shaping the blockchain systems of the future. 

This article is for informational purposes only and does not constitute investment, financial, or other advice. Blockchain networks and related technologies carry risks, including loss of funds. You should do your own research before engaging in any activity related to MEV or blockchain validation.