The key to understanding decentralized finance can be found in MEV or maximum extractable value, an innovative mechanism in the DeFi world. It is what allows market participants to influence prices.

It's no secret that the leading ведущей cryptocurrency owned by Australia is bitcoin. Today, it holds almost half of the total value of all cryptocurrencies. As of February 2, 2024, this digital coin accounts for more than 48% of the total value of the cryptocurrency market. But have you ever wondered what macroeconomic factors determine the prices of cryptocurrency assets?

Let's find out how MEV affects your investments and makes you make informed decisions when trading on a crypto exchange. Let's delve deeper into the world of MEVs and revise our ideas about cryptocurrencies.

In a nutshell

MEV is a powerful weapon in the hands of skilled cryptogeniuses, a way to squeeze maximum value out of each block by playing with transactions like a true ace: skillfully including, excluding, and rearranging transactions to earn more than just fees and commissions.

The concept was first applied in the context of proof-of-work. It was originally called "miner-extractable value". The idea was that with proof-of-work, miners had control over the inclusion, exclusion, and ordering of transactions. However, with the move to proof-of-stake (PoS), validators are now fulfilling this role.

Details about PoS

In the fall of 2022, there was a transition to a PoS system in the Efirium network. Now validators are involved in blockchain staking, and users become major participants in the blockchain ecosystem, analyzing transactions and looking for lucrative MEV opportunities. They send transaction information for new blocks that validators enable, for which they get paid in the form of gas (transaction fees on the blockchain). Most of the revenue goes to the validators as they select transactions with high fees.

It is MEV that plays into the hands of validators: it increases the network's commission with the additional user costs associated with transactions in decentralized applications.

About MEV in brief

By 2030, the global cryptocurrency market is projected to grow 12.5% per year according to Grand View Research. Not the least of which will be MEV, a new method of making money on cryptocurrency exchanges. It is being used predominantly on the Ethereum network. So what is this phenomenon?

• This is an opportunity to maximize profits from blockchain
• It is an important part of the ethereum ecosystem
• It is a trend in the world of decentralized finance that requires deep understanding and caution

The MEV manifests itself in practice through frontrunners - ways in which one can see a buy or sell order prior to its inclusion on the blockchain and use that information to one's advantage.

Of the negative consequences of MEVs: validators can manipulate the market by pricing assets cheaply to attract buyers and then quickly selling their cryptocurrencies at a high price.

Instant benefits in blockchain: the MEV mechanism

Miners and validators collect users' information into blocks and add it to the blockchain chain and ensure uniformity of transactions on the network. However, block producers are not required to select transactions based on commission. Validators can change the order of transactions in their own interest by adding or eliminating certain transactions. MEVs are selecting and reordering transactions in their own interest through arbitrage or elimination in the chain.

Blockchain nodes can react instantly to changes in market conditions and capitalize on them. There are several types of MEV strategies:

1. Front running is a practice where a market participant intentionally interferes with another participant's trade, taking profit from price changes.
2. Back running, on the other hand, is a strategy where a market participant with information about an upcoming trade can use it to their advantage. For example, an exploiter can quickly buy a large amount of tokens after a new pool appears on Uniswap, taking the first position in line and essentially draining the pool.
3. Participation in DeFi decentralized protocols (liquidity, staking, borrowing). Here, MEV is used to determine the optimal moment to participate in such protocols in order to maximize profit.
4. Sandwich attack. This is a combination of front running and back running. A bot places an order before a large buy order, then sells the tokens at a high price, earning on the difference between the two previous schemes.
5. Liquidation. This is a strategy where a validator acquires a liquidated position in a lending protocol immediately after liquidation. The user reacts to the possible disappearance of their position in the next block, sending a transaction to redeem the collateral.
6. Uncle bandit attack is a complex MEV strategy based on a speculative chain of transactions from a competing block. Miners sometimes use data from the "adjacent" block to their advantage, creating risks for other participants.
7. Time bandit attack. This is a reorganization of past blocks where miners change the order of operations for their personal gain. However, this strategy often leads to negative consequences for network participants.

Battle for MEV: how to make money

MEV methods seem to benefit blockchain creators exclusively, but in fact much of that profit goes to validators. They actively seek out MEVs, analyze the information, and seek to increase their income.

Depending on the level of competition for MEV opportunities, blockchain creators could receive up to 99% of potential profits.

For nodes and arbitrageurs, the ability to manipulate and capitalize on MEVs is a distinct advantage. Such arbitrage opportunities will attract more participants and strengthen the security and decentralization of the blockchain network. However, for ordinary users, transaction costs increase, and arbitrageurs' transactions take up bandwidth ahead of others, degrading the user experience.

On the other hand, diligent arbitrageurs increase the efficiency of the blockchain, minimize differences in the price of cryptocurrencies on the blockchain, and secure the use of credit protocols. However, MEVs pose challenges to the blockchain network, possibly making it more centralized and opening the door to new attacks.

Let's break it down with an example: A user of the Ethereum app wants to exchange 10000 USDC for ETH at $2000 per token on a decentralized exchange (DEX) in the USDC/ETH liquidity pool. After placing the exchange request:

1. In the mempool, bots track unconfirmed transactions and gather information from DeFi platforms (about price, liquidity volume).
2. Upon detecting the user's intention to purchase ETH, robots initiate a transaction, which increases the price before the deal is completed. The bot adds additional USDC to the pool to raise the price of ETH. This is why the expected price of $2000 per ETH the user was expecting changes to a hypothetical $2500.
3. The transaction will be completed: instead of receiving 5 ETH, the user will get 4, and the profit from the operation will be 1 ETH.

MEV: a new era for blockchain

MEV, or Miner Extractable Value, is a method aimed at maximizing profits and making adjustments to the cryptocurrency ecosystem. Competition among MEV seekers, who aim to profit from arbitrage on DEX platforms, leads to rapid price changes and helps control credit risk. However, such practices, like front-running, can harm the interests of other system participants, leading to overpaying for transactions or losing money.

The unique pros of MEVs outweigh the cons. With the new capabilities, validators increase their profitability and efficiency. MEV also increases competition among miners and reduces centralization in the blockchain. Finally, MEV can drive the development of new cryptocurrency technologies and innovations. Finding and implementing methods to optimize MEV requires constant analysis and experimentation, which can lead to the creation of new tools and solutions that improve the network as a whole.