MEV Extraction

The practice of placing a transaction immediately before a known pending transaction to profit from its anticipated price impact. This is often done by observing the mempool and using higher gas fees to ensure priority placement.

• Example: A searcher sees a large pending DEX swap for ETH/USDC. They buy ETH first, causing the price to rise, then sell the ETH into the victim's trade for a profit.

Placing a transaction immediately after a target transaction to capitalize on the state changes it creates. This is common with DEX arbitrage and liquidations.

• Example: After a large trade creates a price imbalance between two DEXs, a searcher executes an arbitrage trade in the same block to capture the spread. This can be a neutral or even beneficial form of MEV.

A specific, harmful form of frontrunning that surrounds a victim's trade. The attacker places one order before and one after the target transaction.

• Process: 1. Frontrun: Buy the asset, driving the price up. 2. Victim executes: Their trade occurs at the worse, inflated price. 3. Backrun: Sell the asset, profiting from the price increase caused by the victim's trade. This results in slippage and lost value for the victim.

A sophisticated attack where a validator or miner reorganizes the blockchain (reorg) to extract MEV from past blocks. This undermines blockchain finality.

• Mechanism: A validator withholds a mined block, sees a more profitable transaction ordering in a competitor's block, and then attempts to mine a longer chain starting from the parent block to 'steal' the profitable ordering. This is a major security concern mitigated by proposer-builder separation (PBS).

The process of seizing undercollateralized positions in lending protocols (like Aave, Compound) is a primary source of MEV. Searchers compete to be the first to submit a liquidation transaction, earning a liquidation fee.

• This is often considered 'good' or necessary MEV, as it maintains the protocol's solvency. Competition is focused on latency and gas optimization to be first.

Exploiting price differences for the same asset across different decentralized exchanges (DEXs) or liquidity pools. This is a fundamental, market-stabilizing form of MEV.

• Process: A searcher buys an asset on the cheaper DEX and simultaneously sells it on the more expensive one, profiting from the spread. This activity helps align prices across the ecosystem.

Searchers are independent agents or bots that scan the mempool and simulate state changes to identify profitable MEV opportunities. They construct arbitrage, liquidations, or sandwich attacks and submit transaction bundles to validators for inclusion.

• Primary Role: Opportunity discovery and bundle creation.
• Tools: Use sophisticated algorithms and private RPCs to gain an edge.
• Example: A searcher spots a large DEX swap that will move the price, then front-runs it with their own trade.

Builders are specialized block producers that compete to construct the most valuable block by aggregating transactions and bundles from searchers. They optimize for the validator's revenue (the block reward plus transaction fees and MEV).

• Primary Role: Block construction and optimization.
• Mechanism: Use a builder API to receive bundles and assemble a complete block proposal.
• Proposer-Builder Separation (PBS): A design where builders and proposers (validators) are distinct roles to mitigate centralization risks.

Proposers are the validators chosen to propose a new block for the network. In the MEV supply chain, they typically accept the most profitable block header from builders via a relay.

• Primary Role: Block proposal and consensus.
• Incentive: They select the builder's block offering the highest payment (the bid).
• Key Concept: Under PBS, the proposer commits to a block header without seeing the full contents, trusting the builder's execution.

Relays are trust-minimized intermediaries that facilitate communication between builders and proposers in a Proposer-Builder Separation (PBS) model. They receive full blocks from builders and header/bid information to proposers.

• Primary Role: Mitigate censorship and ensure fair auction.
• Function: Relays validate builder blocks, run them against local execution, and present the highest bids to proposers.
• Trust Assumption: Proposers must trust the relay not to censor builders or manipulate bids.

Regular users and decentralized applications (dapps) are the source of MEV opportunities through their transactions. Their actions—like large trades or undercollateralized loans—create the profit pools that searchers exploit.

• Impact: Users often bear the cost of MEV through slippage (sandwich attacks) or missed opportunities.
• Solutions: Use private transaction pools (e.g., Flashbots Protect, Taichi Network) or MEV-aware protocols to shield transactions from extraction.

MEV extraction directly harms end-users through practices like front-running and sandwich attacks. These tactics result in:

• Increased transaction costs as bots compete in gas auctions.
• Failed transactions and slippage when trades are exploited.
• Censorship where certain transactions are excluded from blocks.
• A degraded, unpredictable experience that undermines trust in decentralized applications.

The profitability of MEV creates powerful incentives that can lead to centralization. This occurs through:

• Proposer-Builder Separation (PBS), where specialized block builders with advanced algorithms dominate.
• The rise of MEV relays as trusted intermediaries between builders and validators.
• Economic pressure favoring large, sophisticated validator pools that can capture more value, potentially threatening network neutrality and censorship-resistance.

MEV strategies extend beyond DeFi into gaming and NFT ecosystems. Common exploits include:

• Sniping rare NFTs or in-game assets by front-running public mint transactions.
• Jito-style bundles to guarantee placement for asset purchases during high-demand drops.
• Exploiting on-chain game mechanics (e.g., claiming rewards, land sales) by observing the mempool, creating an unfair environment for regular players.

Protocols have emerged to mitigate MEV's negative impacts and redistribute its value. Key solutions include:

• Flashbots SUAVE: A decentralized block-building network aiming to democratize access.
• MEV-Boost (Ethereum): A marketplace that allows validators to outsource block building, capturing MEV rewards.
• MEV smoothing or burning mechanisms, like EIP-1559's base fee, which can capture some extractable value for the network or its users.

MEV dynamics evolve with multi-chain ecosystems. Key considerations include:

• Cross-chain MEV (ccMEV): Arbitrage between assets on different chains via bridges, requiring sophisticated coordination.
• L2 Sequencing MEV: On Optimistic and ZK Rollups, the sequencer has privileged transaction ordering, creating a centralized MEV capture point.
• Emerging solutions like shared sequencers and decentralized sequencing aim to manage these new attack vectors.

MEV is a first-order consideration in new blockchain and application design. This influences:

• Encrypted Mempools (e.g., Shutter Network) to prevent front-running.
• Fair Sequencing Services that order transactions by received time.
• Application-specific mechanisms like CowSwap's batch auctions or FBA (Frequency-Bonding Auctions) that are inherently more resistant to extraction.

The most common MEV attack where a searcher's transaction is ordered before (frontrun) and after (backrun) a victim's trade to profit from predictable price impact. This directly harms users by increasing their slippage and execution costs.

• Mechanism: Searchers use bots to detect pending DEX trades in the mempool.
• Impact: Users receive worse prices, paying an implicit 'MEV tax'.
• Example: A large Uniswap swap is sandwiched, costing the user thousands in lost value.

A severe threat to blockchain consensus where validators or miners are incentivized to re-write recent blockchain history to capture MEV they missed. This undermines the finality and immutability of the ledger.

• Mechanism: A validator withholds a block to create a private chain fork that includes profitable MEV transactions.
• Risk: Compromises settlement guarantees, enabling double-spending.
• Mitigation: Protocols like Ethereum's proposer-builder separation (PBS) aim to reduce this incentive.

The profitability of MEV extraction creates economies of scale, favoring large, sophisticated validator operations. This can lead to validator centralization, which poses a censorship and single-point-of-failure risk to the network.

• Cause: Access to low-latency infrastructure, proprietary data, and advanced algorithms is not evenly distributed.
• Outcome: Smaller validators are outcompeted, reducing network resilience.
• Evidence: Post-merge Ethereum has seen a rise in dominant block-building entities.

MEV extraction activities, particularly during volatile market events, generate massive volumes of competing transactions. This floods the mempool, driving up gas prices for all network users and causing delays.

• Trigger: Events like liquidations, oracle updates, or major NFT mints.
• Consequence: Regular users are priced out of timely transactions.
• Example: The 2021 'Gas Wars' during popular NFT launches saw gas prices exceed 5,000 Gwei.

Validators or block builders can be incentivized to exclude certain transactions from blocks, either for profit (e.g., ignoring low-fee arbitrage opportunities) or for regulatory compliance, threatening network neutrality.

• Profit-Driven: Ignoring transactions that compete with the validator's own MEV strategies.
• Regulatory Risk: Complying with sanctions lists by censoring addresses.
• Systemic Impact: Undermines permissionless access, a core blockchain tenet.

Searchers are specialized bots or individuals who identify and execute profitable MEV opportunities. They run complex algorithms to scan the mempool for arbitrage, liquidations, or other profitable transactions, then craft and submit their own transaction bundles to capture the value.

• Role: Discover and propose MEV transactions.
• Tools: Use private transaction relays and sophisticated simulation software.

Builders are specialized block producers that construct complete block contents. They compete to create the most profitable block by accepting transaction bundles from searchers and ordering them to maximize extractable value for the validator.

• Role: Assemble and optimize block contents.
• Key Concept: Centralizes around block building as a service, often using private order flow.

PBS is a protocol design that formally separates the roles of block builder and block proposer (validator). Its goal is to mitigate centralization risks and censorship by creating a competitive market for block building.

• Mechanism: Builders bid for the right to have their block proposal accepted by the proposer.
• Outcome: Aims to democratize MEV profits and improve network resilience.

Front-running is a specific MEV extraction technique where a searcher observes a pending profitable transaction in the mempool and submits their own transaction with a higher gas fee to execute first. This allows them to capture the opportunity the original transaction intended to claim.

• Example: Seeing a large DEX trade and buying the asset first to profit from the price impact.
• Considered: A parasitic or negative externality form of MEV.