The growth of the decentralized finance (DeFi) market makes the Ethereum ecosystem an integral part of the global financial market. Meanwhile, the expensive gas fee turns out a barrier to ordinary players and new users entering Ethereum. The skyrocketing gas fee can be attributed to not only the increasing number of on-chain transactions, but also the tempting miner extracted value (MEV) of Ethereum, which incites “treasure hunters” to keep raising the gas fee until they front-run transactions, i.e., an irresistible treasure.
The profit-making logic behind MEV operations is nothing new for the traditional financial markets. Brokers, as an intermediary in the market, should keep their customers’ trading behavior confidential and execute their instructions strictly. The role of brokers as an intermediary enables them to access a large amount of trading behavior data. If the information asymmetry is used by brokers to carry out front-running operations before executing customers’ trading orders, it will be a complete arbitrage success. Therefore, the traditional financial market regime puts brokers under rigorous scrutiny, so as to prevent them from reaping personal profits at the expense of users.
On the transparent and open Ethereum platform, the initiative of engaging in front-running or arbitrage fall into the hand of miners, so this part of the profit is also called “MEV”. Since January 1, 2020 (as of June 10, 2021), at least US$749 million worth of MEV has been extracted, and failed MEV transactions have wasted US$12.5 million, equivalent to 6,155 Ethereum blocks, according to MEV-Explore, developed by Flashbots, an MEV research and development (R&D) organization. MEV, therefore, has evolved into a problem that cannot be underestimated in the Ethereum ecosystem.
The name MEV (miner extracted value) is misleading, because the profit going to miners only accounts for a small part of the total MEV. The data show that miners have only obtained 11% of the MEV extracted in Ethereum and the remaining 89% share has been overwhelmingly racked up by DeFi traders and robots. Instead of extracting MEV by themselves, miners now prefer to cooperate with DeFi traders for profit sharing or outsource the transactions packaging work to DeFi traders through the open MEV infrastructure Flashbots.
MEV now mainly comes from trading arbitrage, which accounts for 97% of the total. As the DeFi market expands, there will be increasing arbitrage opportunities. The total MEV will go up accordingly. This may bring it with three problems: 1) the soaring gas fee pushes up the normal transaction costs, 2) the failed MEV transactions occupy blockspace, leading to network congestion, and 3) the security of Ethereum is under potential threat.
MEV attracts close attention from different user groups. Many mining pools and dark pools that support private transactions are trying to get a piece of the MEV pie. At the same time, Ethereum developers, DeFi project developers, and professional research institutions are all racing to put forth MEV solutions. Typical projects include Flashbots, KeeperDAO, ArcherDAO, and ROOK. Research efforts are mainly focused on real-time monitoring and disclosure of MEV data to eliminate information asymmetry, bidding in advance to avoid the gas fee paid when transactions fail, and constructing a reasonable profit distribution mechanism for miners and traders.
Take ArcherDAO for example. DeFi traders route transactions to miners through the ArcherDAO protocol, and then miners package transactions into blocks. When arbitrage finally succeeds, the protocol will distribute the proceeds to DeFi traders and miners in a certain proportion.
Flashbots introduces MEV-Geth where DeFi traders need to initiate and package transactions. A transaction package contains the tasks to be processed and the tips paid to miners. The package will be received by MEV-Relay and then sent to all miners who use MEV-Geth. Upon the receipt of the package, miners will processes it through MEV-Geth. MEV-Geth selects the most profitable transaction packages from all available ones and compares them with a regular block in Ethereum. In this case, traders need to pay the gas fee, only when transactions succeed. In other words, failed transactions incur no such fee.
For miners, MEV is undoubtedly an opportunity to increase income. Especially after Ethereum’s EIP-1559 comes into place, miners will be more sensitive to income. Miners’ participation in MEV extraction, through either ArcherDAO or Flashbots, will help to improve the MEV distribution, a prerequisite for protecting Ethereum from being adversely impacted by the miners too obsessed with MEV to behave well. As thus, MEV is still a good way for miners to gain additional revenue.
The continuous development of the Ethereum ecosystem, along with the constant expansion of the DeFi market as part of the ecosystem, is indeed a boon to miners. Many of them, therefore, become more optimistic about Ethereum. ViaBTC Pool means not only a source of stable income, but also the availability of automatic token conversion every hour. Although the emergence of MEV has caused considerable concern about the future stability and security of Ethereum, the solutions to the MEV problem are being introduced and improved with each passing day. Ignoring MEV for fear of its problems isn’t a sensible choice. The reasonable distribution of such value among relevant parties will facilitate the booming development of the system, enable more people to benefit, propel the open and transparent Ethereum ecosystem towards stable development, and create favorable conditions for the DeFi ecosystem to grow and thrive.
