What is MEV and How Can You Profit from It?
MEV, also known as Maximum Extractable Value, is a fundamental concept in the realm of cryptocurrency and blockchain. It empowers miners, validators, and various network participants to earn profits by strategically ordering, including, or excluding transactions within a block.
This practice enables them to maximize the potential value that can be extracted from the transactional activity on the blockchain.
To enhance comprehension, it is worth highlighting two primary types of MEV that serve as the foundation for various earning and benefit opportunities:
- Transaction Selection (Censorship). Miners or validators can take advantage of high network load by selectively processing transactions with a higher gas fee (more expensive commission) or prioritizing their own transactions. In this way, they can increase their profits or pursue other self-serving goals.
- Front Running. The essence of this type is to outpace already created transactions. For example, a user initiates the purchase of a large amount of a certain token on a DEX platform. Buying this token can potentially increase its price. Because the blockchain implies transparency and all its transactions can be tracked, an arbitrageur notices this and sends a competing transaction with a higher gas fee to quickly buy the same tokens and sell after they appreciate from the first user's purchase.
MEV plays a positive role for those who profit from it, but for the most part, it leads to negative consequences that worsen the experience of using the network or a decentralized platform. These can include transaction processing delays, increased commission size, and worsened exchange rates.
Therefore, ways to combat MEV or compromise solutions that could satisfy all network participants began to emerge:
- Flashbots tools, which allow users to send their transactions directly to miners or validators, bypassing the public mempool. This helps to reduce gas prices, minimize transaction delays, and mitigate primary problems, improving the overall efficiency of the network.
- MEV auctions - a method of distributing transaction processing rights. Validators or miners participate in a bidding process for the right to form a block. The one who offers the best conditions wins. This approach creates a more transparent and fair transaction processing market.
- Batching transactions also helps to reduce the negative aspects of MEV. Thanks to batch processing, the chances of appearing front-running transactions, created with the intention of some manipulations, are significantly reduced.
Dmytro Psevdonimenko
Author
Has been exploring the enigmas of the crypto industry since 2017, transforming them into accessible narratives. Relies on dark chocolate and nuts as a secret source of energy and inspiration.
