MEV (Maximal Extractable Value)

The practice of placing a transaction ahead of a known pending transaction to profit from its anticipated market impact. This is a primary MEV extraction strategy.

• Example: A bot sees a large DEX trade about to execute, places its own trade first to move the price, and profits from the slippage.
• It often manifests as gas price auctions, where bots compete to have their transaction processed first.

Placing a transaction immediately after a target transaction to capitalize on the state change it creates. This is a less aggressive form of transaction ordering arbitrage.

• Common Use: Executing an arbitrage trade after a large swap rebalances a liquidity pool, or liquidating an undercollateralized loan right after its health factor drops below the threshold.
• Often bundled with the target transaction in the same block.

A specific, harmful form of frontrunning that sandwiches a user's transaction between two attacker transactions.

• Mechanism: 1) Frontrun the victim's large trade to buy the asset, 2) Let the victim's trade execute, pushing the price, 3) Backrun to sell the asset at the new, higher price.
• This results in increased slippage and worse execution for the end user, with the attacker capturing the difference.

A consensus-level attack where validators or miners attempt to reorg (reorganize) the blockchain to steal MEV that was already extracted in a prior block. This threatens chain finality and network security.

• It creates an incentive for validators to orphan blocks that contain profitable MEV opportunities they missed.
• Mitigated by proposer-builder separation (PBS) and faster finality mechanisms.

A protocol design that separates the roles of block building (selecting and ordering transactions) from block proposing (signing the block header). It is a core MEV mitigation architecture.

• Builders compete to create the most profitable block (including MEV) in a sealed-bid auction.
• Proposers (validators) simply choose the highest-paying block header.
• Aims to democratize MEV access and reduce centralization risks.

The most common MEV strategy, arbitrage exploits price differences for the same asset across different decentralized exchanges (DEXs) or liquidity pools within the same block. A searcher detects the discrepancy, bundles a buy transaction on the cheaper venue and a sell transaction on the more expensive one, and pays a validator to order the transactions for a guaranteed profit.

• Example: Buying ETH on Uniswap where it's priced at $3,000 and immediately selling it on SushiSwap where it's priced at $3,010 in the same block.
• Tools: Searchers use sophisticated bots and mempool monitoring to identify these fleeting opportunities.

This strategy involves triggering the forced closure of undercollateralized loans in lending protocols like Aave or Compound. Searchers monitor loan health and, when a position falls below the required collateralization ratio, they submit a transaction to perform the liquidation. They are rewarded with a liquidation bonus, a percentage of the collateral.

• Key Factor: Speed is critical, as the first valid liquidation transaction gets the reward, leading to gas auctions where searchers bid up transaction fees.
• Impact: While profitable for searchers, this activity is essential for protocol solvency.

A sandwich attack is a predatory strategy that targets large, visible trades in the mempool. The searcher places one transaction before the victim's trade (front-running) and one after it (back-running).

• Mechanism: The first transaction buys the asset, artificially inflating its price via slippage. The victim's trade executes at this worse price. The searcher's second transaction then sells the asset at the inflated price, profiting from the victim's slippage.
• Consequence: This directly harms the end-user by increasing their execution cost and is a primary source of negative MEV.

A more complex and contentious strategy where a validator or coordinated group exploits the ability to reorganize (reorg) the blockchain itself. Instead of competing in the current block, they attempt to mine a competing chain in secret, one that excludes certain transactions and includes their own profitable ones. If their chain becomes longer, the network accepts it, rewriting history.

• Requirement: This requires significant hashing power (in Proof-of-Work) or stake (in Proof-of-Stake).
• Risk: It undermines blockchain finality and is considered a severe form of consensus-level MEV.

Just-in-Time (JIT) Liquidity is a strategy specific to automated market makers (AMMs) like Uniswap V3. A searcher observes a large swap that will incur high slippage due to low liquidity. In the same block, they:

1. Provide a large amount of concentrated liquidity exactly around the current price.
2. Let the victim's swap execute against their deep liquidity, earning the swap fees.
3. Immediately remove the liquidity.

• Nature: This is often seen as a "good" or neutral form of MEV, as it provides liquidity when needed and improves execution for the swapper, while the searcher earns fees instead of extracting value via slippage.

This strategy exploits the reliance of DeFi protocols on price oracles. Searchers manipulate the on-chain price feed for an asset in a low-liquidity market (e.g., a small DEX pool) to trigger profitable actions in a separate, larger protocol.

• Example: Artificially pumping the price of a collateral asset on a manipulable oracle to borrow more than allowed against it on a lending platform.
• Defense: Protocols mitigate this by using time-weighted average prices (TWAPs) or decentralized oracle networks like Chainlink, which are more expensive and slower to manipulate.

Proposers are the Ethereum validators selected to propose a new block. They receive block proposals from builders via relays and choose the one with the highest bid (the promised payment to the validator). The proposer's role is to finalize the block ordering, and they capture value through these bids, known as MEV-Boost payments. Their economic incentive is to maximize their reward, making them the ultimate arbiters of transaction inclusion.

Relays are trusted intermediaries that facilitate communication between builders and proposers in a PBS system. They receive block bids from multiple builders, perform basic validity checks (e.g., no invalid transactions), and present a list of available bids to the proposer. Relays ensure proposers cannot steal the builder's block content without paying, acting as a commit-reveal mechanism to prevent theft of execution. Their neutrality and reliability are critical for ecosystem health.

Users are the originators of transactions that create MEV opportunities. They can be unwitting victims (e.g., of sandwich attacks) or active participants (e.g., submitting a large DEX trade). User behavior and transaction characteristics (like slippage tolerance) directly influence the MEV landscape. Protocols like CowSwap and Flashbots Protect aim to shield users from negative MEV by using batch auctions or private transaction pools.

The design of smart contracts and DeFi protocols fundamentally determines the MEV surface. Key design elements include:

• Automated Market Makers (AMMs): Constant product curves create arbitrage paths.
• Lending Protocols: Define liquidation conditions and incentives.
• Block Builders: Protocols like Flashbots and BloxRoute provide infrastructure.
• MEV-Aware DApps: Some applications integrate MEV capture or protection directly into their user experience.

Frontrunning occurs when a searcher observes a pending transaction (e.g., a large DEX trade) and submits their own transaction with a higher gas fee to execute first, profiting from the anticipated price impact. A sandwich attack is a specific form where the attacker places one order before and one after the victim's transaction, trapping it to extract value from slippage.

• Example: Profiting from a user's large swap(ETH for USDC) on Uniswap by buying ETH first and selling it after the user's trade moves the price.

This is a risk where validators or miners are incentivized to reorganize the blockchain (reorg) to steal already-included MEV. If a highly profitable arbitrage opportunity is mined in a recent block, a validator might attempt to mine an alternative chain starting from a prior block to capture that profit for themselves, undermining chain finality.

• This attacks the safety of the blockchain, as transactions considered confirmed could be reversed.

Validators can censor transactions by excluding them from blocks entirely. This can be for-profit (e.g., excluding transactions that compete with the validator's own arbitrage) or regulatory. MEV-Boost relays in Ethereum's PBS (Proposer-Builder Separation) model can also act as censorship vectors by filtering which transaction bundles are passed to block proposers.

The competition to capture MEV leads to gas price auctions, where searchers bid up transaction fees to have their bundles included. This results in:

• Increased base fee for all network users.
• Unpredictable gas costs and failed transactions for regular users outbid by bots.
• Network spam from searchers broadcasting many speculative transaction bundles.

MEV extraction favors sophisticated, well-capitalized players with low-latency infrastructure, creating barriers to entry. This can lead to:

• Validator centralization: Entities with the best MEV strategies earn more, allowing them to stake more ETH and increase their share of consensus.
• Geographic centralization around data centers for latency advantages.
• Economic centralization where MEV profits accumulate to a small set of professional searchers and block builders.

Several protocols and design changes aim to mitigate MEV risks:

• Proposer-Builder Separation (PBS): Separates the role of block building (by competitive builders) from proposing (by validators) to reduce reorg incentives.
• Encrypted Mempools (e.g., SUAVE): Hide transaction content until inclusion to prevent frontrunning.
• Fair Sequencing Services / FCFS: Enforce a first-come-first-served order for transaction processing.
• MEV-Sharing (e.g., MEV-Share): Protocols that allow users to capture a portion of the MEV from their transactions, realigning incentives.