MEV (Maximal Extractable Value)

The most common and generally benign MEV strategy. Arbitrage bots profit from price discrepancies of the same asset across different decentralized exchanges (DEXs) or liquidity pools within the same block.

• Example: Buying ETH on Uniswap where it's priced at $1,800 and simultaneously selling it on SushiSwap where it's priced at $1,805 in the same transaction bundle.
• This activity helps align prices across markets, improving market efficiency.

A critical function in DeFi that is often automated by liquidator bots. When a loan on a lending protocol (like Aave or Compound) falls below its required collateralization ratio, these bots race to repay the undercollateralized debt in exchange for the collateral at a discount.

• The liquidator earns a liquidation bonus (e.g., 5-10%).
• This activity is necessary for protocol solvency but creates a competitive, high-speed environment for MEV extraction.

A malicious MEV strategy that targets pending DEX trades. A searcher identifies a large pending swap that will move the market price.

1. Frontrun: The searcher buys the asset first, driving the price up.
2. Victim's Trade Executes: The victim's large trade executes at the worse, inflated price.
3. Backrun: The searcher sells the asset immediately after, profiting from the price impact.

This results in slippage and financial loss for the original trader.

A severe, theoretical attack on blockchain consensus. A miner/validator could re-mine or reorg past blocks to extract MEV opportunities that were missed or captured by others in the original chain history.

• This undermines the finality of the blockchain.
• It is considered an existential threat and is largely prevented by modern consensus mechanisms (e.g., Ethereum's proposer-builder separation) and social consensus.

MEV extraction specific to the NFT ecosystem. Strategies include:

• NFT Arbitrage: Sniping undervalued NFTs listed for sale below floor price across different marketplaces.
• Bundling: Frontrunning a known profitable NFT trade by including it in the same bundle.
• Trait Snipping: Using bots to automatically mint or buy NFTs with rare trait combinations the moment they are revealed.
• These activities often target the Dutch auction and reveal mechanics common in NFT launches.

Advanced strategies that involve creating and destroying liquidity within a single block.

• Just-in-Time (JIT) Liquidity: A liquidity provider sees a large swap destined for a pool. They add a massive amount of liquidity to that pool just before the swap executes (earning the fees), and then remove the liquidity immediately after in the same block, avoiding impermanent loss.
• CFMM (Constant Function Market Maker) Optimization: Crafting complex bundles to optimally route trades through multiple pools for maximal output, beyond simple two-pool arbitrage.

Maximal Extractable Value (MEV) is the total value that can be extracted from a blockchain by reordering, including, or censoring transactions within a block, beyond the standard block reward and gas fees. It arises from the miner's or validator's ability to determine transaction order. The primary mechanisms include:

• Arbitrage: Exploiting price differences across DEXs.
• Liquidations: Triggering and capturing liquidation penalties from undercollateralized loans.
• Sandwich Attacks: Placing orders around a victim's large trade to profit from slippage.

The MEV supply chain involves specialized actors competing for profit.

• Searchers: Automated bots that scan the mempool for profitable opportunities and create transaction bundles.
• Builders: Specialized nodes that construct the most profitable block possible by optimizing the inclusion and order of transaction bundles from searchers.
• Validators/Proposers: The entities that ultimately propose the block, typically selecting the builder's payload offering the highest payment (e.g., via a relay). This separation of roles is central to Proposer-Builder Separation (PBS) designs.

MEV extraction creates significant network externalities and risks for users.

• Network Congestion & High Gas Fees: Bidding wars between searchers drive up base gas prices for all users.
• Frontrunning & User Harm: Techniques like sandwich attacks directly extract value from regular users' trades, worsening their execution price.
• Chain Reorganization Risk (Reorgs): Validators may be incentivized to orphan a block to capture a more profitable MEV opportunity, threatening chain stability.
• Censorship: Transactions can be excluded from blocks for economic or political reasons.

Several protocol-level and application-layer solutions aim to mitigate MEV's negative effects.

• Proposer-Builder Separation (PBS): Architecturally separates block building from proposal to reduce centralization risks (e.g., Ethereum's mev-boost).
• Encrypted Mempools (e.g., SUAVE): Hide transaction content from searchers until blocks are built.
• Fair Sequencing Services: Use decentralized or trusted sequencers to order transactions fairly.
• Application-Level Protections: DEXs use mechanisms like CowSwap's batch auctions or Flashbots Protect RPC to shield users from frontrunning.

Infrastructure like mev-boost on Ethereum has formalized MEV markets, creating a new revenue stream for validators. This leads to discussions on redistribution:

• MEV-Boost: Allows Ethereum validators to outsource block building to a competitive market, capturing MEV revenue as extra rewards.
• MEV Smoothing / Burning: Proposals to redistribute extracted MEV more evenly across all validators or burn a portion to benefit the entire network (e.g., via protocol-level proposer payments). This aims to reduce validator inequality and centralization pressures.

Understanding MEV requires familiarity with adjacent terms.

• Dark Forest: Metaphor for the competitive, opaque environment of on-chain trading.
• Gas Golfing: Writing ultra-efficient smart contract code to minimize gas costs, crucial for searchers.
• Time-Bandit Attack: A reorg attack to rewrite chain history for past MEV.
• PGA (Priority Gas Auction): A bidding war where searchers increase gas prices to get their transaction included first.
• Flashbots: A research and development organization that built critical MEV infrastructure (mev-boost, SUAVE) to mitigate its harms.

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 transaction before and one after the victim's trade, capturing the spread.

• Example: A user's large buy order for a token is detected in the mempool. A bot frontruns it, buying the token first, and then sells into the user's buy pressure for a risk-free profit.

A time-bandit attack involves a miner or validator intentionally reorganizing the blockchain (a reorg) to replace a previously mined block with a new one that captures MEV that was missed. This undermines the finality of the chain.

• Risk: Creates uncertainty for users and applications that assumed a transaction was settled. It can be economically rational for a validator to reorg if the MEV captured exceeds their block reward and the risk of penalties.

Validators can censor transactions by excluding them from blocks entirely. This can be used to block specific addresses or types of transactions (e.g., governance votes, arbitrage opportunities for competitors).

• Centralization Risk: Proposers may be incentivized to sell their block space to the highest bidder in private channels (e.g., PBS-like deals), creating a two-tier system where regular users' transactions are delayed or ignored.

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

• Skyrocketing gas prices for all network users during periods of high MEV opportunity.
• Network instability and unpredictable confirmation times.
• Wasted resources as losing bidders' transactions fail but still consume network bandwidth.

MEV extraction requires sophisticated infrastructure and capital, creating a significant advantage for professional operators. This leads to:

• Proposer-Builder Separation (PBS): A design to mitigate this by separating the roles of block building (complex MEV extraction) and proposing (adding the block to the chain).
• Risk: Without PBS or similar mitigations, the most profitable validators can reinvest profits, leading to a concentration of staking power and potential control over the chain.

An MEV strategy where a searcher submits a transaction to execute immediately after a specific target transaction in the same block. This is less disruptive than frontrunning.

• Common Use: Liquidations in lending protocols, where a searcher repays a loan and claims the collateral after a price update triggers it.
• DEX Arbitrage: Profiting from price discrepancies created by a large trade that moves the market.

An entity (often a bot operator) that identifies and executes profitable MEV opportunities. Searchers compete in a real-time auction, bidding transaction fees to validators to have their bundles included.

• Tools: Use sophisticated algorithms to scan the mempool and simulate transaction outcomes.
• Role: The primary source of MEV extraction, responsible for constructing the transaction bundles that capture value.