DeFi MEV

The most common form of MEV, where searchers profit from price differences across decentralized exchanges (DEXs). A searcher identifies an asset priced lower on DEX A than on DEX B, then creates a transaction bundle for a block builder to execute a buy on A and an immediate sell on B, capturing the spread. This activity is generally considered benign as it helps align prices across markets.

A critical, protocol-enforced MEV opportunity in lending protocols like Aave and Compound. When a borrower's collateral value falls below the required health factor, their position becomes eligible for liquidation. Searchers compete to be the first to submit a liquidation transaction, paying off part of the debt in exchange for seizing the collateral at a discount, earning a liquidation bonus. This activity is essential for protocol solvency.

A malicious form of MEV that targets ordinary user transactions. A searcher detects a large pending DEX swap that will move the market price. They then:

• Front-run it by buying the asset first.
• Let the user's swap execute, pushing the price up.
• Back-run it by selling the asset at the higher price. The attacker profits from the artificial price movement, while the victim suffers increased slippage and a worse price.

The modern MEV supply chain separating roles for efficiency. Searchers run algorithms to find opportunities and create transaction bundles. Block Builders (specialized nodes) compete to construct the most profitable block by optimizing bundle inclusion and order. Validators (or block proposers) simply select the highest-paying block from builders. This professionalization has led to a MEV auction where builders bid for the right to have their block included.

New DeFi designs aim to minimize or redistribute MEV. Key approaches include:

• CowSwap: Uses batch auctions and Coincidence of Wants to match trades directly, avoiding on-chain DEX liquidity.
• MEV-Capturing AMMs: Like Uniswap v4, which can incorporate hooks to let liquidity providers earn a share of MEV generated in their pools.
• Fair Sequencing Services: Proposed layer-2 solutions that order transactions to prevent front-running. The goal is to turn MEV from a parasitic cost into a recyclable resource for the protocol or its users.

The most common MEV strategy, where a searcher profits from price discrepancies of the same asset across different decentralized exchanges (DEXs). The searcher's transaction buys the asset at a lower price on one DEX and simultaneously sells it at a higher price on another. This requires atomic execution via a flash loan or bundled transactions to eliminate price risk. For example, a bot might exploit a price difference for ETH/USDC between Uniswap and SushiSwap.

A strategy that involves triggering and claiming the collateral from undercollateralized loans in lending protocols like Aave or Compound. Searchers monitor loan health and, when a loan's collateral ratio falls below the required threshold, they submit a transaction to perform the liquidation. The searcher repays part of the bad debt and receives the collateral at a liquidation discount (e.g., 5-10%) as a reward. Competition for these profitable opportunities is intense, leading to gas auctions.

A predatory strategy that targets large, visible trades in a mempool. The searcher front-runs the victim's trade by buying the same asset first, which drives up the price due to the DEX's automated market maker (AMM) curve. The victim's trade then executes at this inflated price. Finally, the searcher back-runs the victim by selling the asset, profiting from the price impact the victim caused. This strategy directly extracts value from the end-user's trade.

A sophisticated strategy where a liquidity provider (LP) adds a large amount of liquidity to a pool immediately before a large swap executes, and removes it immediately after. The JIT LP captures the majority of the swap fees from that single transaction with minimal exposure to impermanent loss. This is often used in combination with arbitrage, where the JIT LP provides liquidity for the arbitrageur's own profitable trade, effectively internalizing the fee.

An adversarial strategy that targets proof-of-stake (PoS) blockchains by attempting to reorg (reorganize) the chain. Validators or proposers may intentionally orphan a block containing profitable MEV transactions and replace it with a new block that captures that MEV for themselves. This undermines chain finality and is considered a severe form of MEV. Mitigations like proposer-builder separation (PBS) aim to separate block building from proposing to reduce this incentive.

A strategy that targets low-liquidity trading pairs. A searcher manipulates the oracle price of a long-tail asset (e.g., a new meme coin) by executing a series of wash trades on a DEX. This artificially inflates the price reported to a lending protocol's oracle. The attacker then uses the inflated asset as collateral to borrow more valuable, stable assets (like ETH or stablecoins) before the price corrects. This exploits the oracle dependency of DeFi protocols.

Validators (or block proposers) are the entities that run nodes, stake cryptocurrency, and have the right to propose the next block. In the MEV supply chain, their primary role is to select the most valuable block from competing builders. They outsource block construction to maximize their rewards, receiving payments from builders in the form of priority fees and MEV bribes. Their choice influences network centralization and censorship risks.

Relays are trusted intermediaries that sit between builders and validators to enable PBS (Proposer-Builder Separation). Their core functions are:

• Receive block bids from multiple builders.
• Validate block contents for correctness and compliance (e.g., censorship lists).
• Forward the header of the most profitable, valid block to validators. Relays aim to prevent MEV theft where a validator steals a builder's bundle, but they also become potential points of centralization and censorship.

Users are the originators of the transactions that create MEV opportunities. They are often the source of value extracted, sometimes detrimentally as in sandwich attacks. User transaction characteristics—like setting slippage tolerance too high or using public mempools—directly influence their exposure to MEV. Protocols and tools like private transaction pools (RPCs), CowSwap, and MEV-aware wallets aim to protect users.

DeFi protocols and their design choices are fundamental creators of MEV. Key factors include:

• Liquidity pool architectures (e.g., constant product AMMs) that create predictable arbitrage paths.
• Liquidation engines that offer public bonuses.
• Oracle update mechanisms that can be front-run. Protocols can mitigate harmful MEV through design upgrades like time-weighted average prices (TWAPs), fair ordering, or threshold encryption.

A prevalent form of on-chain arbitrage where a bot exploits a pending DEX trade. The attacker:

• Front-runs the victim's large buy order, purchasing the asset first.
• The victim's order executes at a higher price, pushing it up.
• The attacker back-runs the victim, selling the asset for a profit. This results in slippage and loss for the original trader, extracted as profit by the searcher.

A race to profit from undercollateralized loans in lending protocols like Aave or Compound. When a loan's health factor drops below 1, it becomes eligible for liquidation. Searchers run bots to:

• Be the first to submit a liquidation transaction.
• Purchase the discounted collateral.
• Often repay the debt via a flash loan for capital efficiency. This activity is considered necessary for protocol health but concentrates rewards among sophisticated players.

A severe long-range attack vector that threatens blockchain consensus. A malicious validator could reorganize (reorg) the chain to extract MEV from past blocks, rewriting history. This undermines the finality of transactions. Defenses include:

• Proposer-Builder Separation (PBS), which separates block building from proposing.
• Inclusion lists to guarantee transaction fairness.
• Cryptoeconomic penalties like slashing.

MEV extraction creates negative externalities for all network users:

• Gas price auctions: Searchers bid up gas fees to prioritize their transactions, increasing costs for everyone.
• Network congestion: The race for MEV floods the mempool, slowing down ordinary transactions.
• Wasted computation: Failed arbitrage attempts still consume block space and gas. This turns MEV into a common-pool resource problem, where individual profit maximization degrades the shared network.

MEV is not just extracted; it's part of an economic supply chain. Key roles include:

• Searchers: Find and bundle profitable opportunities.
• Builders: Construct optimal blocks using searcher bundles.
• Validators/Proposers: Ultimately sign and propose the block. Solutions like MEV-Boost on Ethereum facilitate a market where block rewards and MEV profits are shared, potentially redistributing value to validators and, through staking, to token holders.