Extracted Value

Sequencer Extractable Value (SEV) is the L2/L3 analog to MEV, specific to rollups and other chains with a centralized or permissioned sequencer. The sequencer, which orders transactions before batch submission to L1, can extract value through:

• Transaction reordering within its batch.
• Censorship of specific transactions.
• Frontrunning user trades on its own DEXs. SEV is a critical consideration for decentralizing sequencers and implementing fair ordering mechanisms.

Staking Extractable Value arises in Proof-of-Stake (PoS) systems where validators have additional revenue streams tied to their staked assets. This includes:

• Liquid Staking Derivatives (LSD) fees: Revenue from issuing derivative tokens like stETH.
• DeFi integrations: Using staked assets as collateral in lending protocols while still validating.
• Governance power monetization: Influencing protocol decisions that benefit the validator's other holdings. This blurs the line between protocol security and financial engineering.

Proposer-Builder Separation (PBS) is a primary architectural response to MEV on Ethereum. It decouples the roles of block building (selecting and ordering transactions) from block proposing (signing the header). This creates a market where:

• Searchers identify MEV opportunities.
• Builders compete to create the most valuable block bundle.
• Proposers (validators) simply choose the highest-paying block header. PBS aims to democratize MEV access and reduce its negative externalities like network congestion.

The profit a validator or searcher can make by reordering, inserting, or censoring transactions within a block they produce. This is the canonical form of extracted value.

• Examples: Front-running user trades, arbitrage between DEXs, liquidating undercollateralized loans.
• Impact: Increases transaction costs and creates a competitive, often opaque, market for block space.

The impermanent loss incurred by liquidity providers in Automated Market Makers (AMMs) when arbitrageurs extract value from the pool.

• Mechanism: When token prices diverge, arbitrageurs trade against the LP pool to correct its price, profiting from the discrepancy. This profit comes directly from the LP's deposited assets.
• Result: LPs often earn less fees than the value extracted via arbitrage, leading to net negative returns versus simply holding the assets.

Extracting value by artificially influencing the price feed an on-chain protocol relies on, triggering unintended liquidations or minting.

• Process: An attacker manipulates the price on a smaller DEX that feeds into an oracle, then exploits the incorrect price on a lending protocol (e.g., to borrow more than collateral allows).
• Real-World Example: The 2020 bZx attacks exploited price oracle latency between Kyber Network and Compound.

Extracting value from governance systems by exploiting the economic incentives of staking or voting.

• Vote Escrowed (ve) Models: In systems like Curve Finance, locking tokens grants boosted rewards and voting power. Extracted value can occur through bribe markets where protocols pay for votes, centralizing influence.
• Staking Reward Dilution: New token emissions directed to large stakers can dilute smaller participants, effectively extracting future value from the community.

A specific, predatory form of MEV targeting a single user's large market order.

• Execution: 1. Front-run: The attacker places a buy order before the victim's buy, driving the price up. 2. Victim's order executes at the worse price. 3. Back-run: The attacker sells the asset back to the victim-inflated pool, profiting from the spread.
• Tooling: Executed by bots scanning the mempool for pending transactions.

When protocol designers or governors set fees that disproportionately benefit themselves or a subset of users, extracting value from general network activity.

• Examples: Excessively high bridge fees, minting fees for NFTs, or treasury allocations from swap fees that don't directly benefit the users paying them.
• Distinction: Unlike MEV, this is a direct, protocol-sanctioned transfer, often criticized when fees are not aligned with service cost or community benefit.

Extracted Value (EV) is the maximum value that can be extracted from block production beyond standard block rewards and gas fees, by manipulating transaction order. It arises from the miner or validator's ability to arbitrarily order pending transactions, enabling strategies like front-running, back-running, and sandwich attacks on user trades.

Common EV extraction strategies include:

• Front-running: Submitting a transaction with a higher gas fee to execute a similar trade before a known pending transaction.
• Sandwich Attack: Placing one order before and one after a target transaction to profit from its price impact.
• Time-Bandit Attacks: Reorganizing the blockchain to steal finalized transactions, a risk under certain consensus models.
• Liquidator Censorship: Excluding profitable liquidation transactions to trigger protocol insolvency.

EV represents a significant economic leakage from users to block producers and sophisticated searchers. This has led to the development of MEV redistribution mechanisms like:

• Proposer-Builder Separation (PBS): Separates block building from proposal to create a competitive market.
• MEV-Boost: A PBS implementation for Ethereum, allowing validators to auction block space to specialized builders.
• MEV Smoothing: Protocols like CowSwap that use batch auctions to minimize extractable value and return it to users.

The pursuit of EV creates critical security risks:

• Network Congestion: Bidding wars for transaction inclusion drive up gas fees for all users.
• Validator Centralization: Entities with advanced EV extraction capabilities gain higher profits, creating a centralizing economic incentive.
• Chain Reorgs: The potential profit from EV can incentivize validators to intentionally reorganize the chain, undermining finality.
• Censorship Resistance: Block producers can be incentivized to censor certain transactions for profit.

The ecosystem employs several strategies to mitigate EV's negative externalities:

• Fair Sequencing Services: Using a trusted or decentralized sequencer to order transactions fairly.
• Encrypted Mempools: Hiding transaction content until inclusion to prevent front-running.
• Commit-Reveal Schemes: Submitting transactions in two phases to conceal intent.
• Protocol Design: Building DeFi primitives (e.g., Uniswap V3) that are more resistant to specific attacks like sandwiching.

Understanding EV requires familiarity with adjacent concepts:

• Gas Fees: The base fee users pay for computation; EV is profit in addition to this.
• Searcher: An entity that runs algorithms to detect and bid for profitable EV opportunities.
• Builder: A specialized actor that constructs blocks full of EV opportunities to sell to proposers.
• Proposer: The validator chosen to propose the next block (in Proof-of-Stake).
• Dark Forest: A metaphor for the hostile, competitive environment of public mempools.

Transaction Ordering is the process of determining the sequence in which transactions are included and executed within a block. It is the primary lever for extracting value in permissionless systems.

• Control: Typically held by the block producer (validator/miner).
• Exploitation: Malicious ordering can enable front-running (preempting a trade) or sandwich attacks (trading around a victim's transaction).
• Solutions: Fair sequencing services and encrypted mempools aim to create neutral ordering.

Economic Security refers to the cost required to successfully attack a blockchain network, often measured relative to the potential rewards from doing so. MEV and Extracted Value directly impact this calculus.

• Stake Security: In Proof-of-Stake, the cost to attack is tied to the value of staked assets.
• MEV Influence: High, predictable MEV can increase the incentive to attack the consensus layer (e.g., through time-bandit attacks).
• Balance: Protocols must ensure honest validation is more profitable than attempting to extract value maliciously.

A Searcher is a network participant (often a bot) that scans the mempool for profitable MEV opportunities, bundles transactions, and submits them to validators or builders. They are the primary agents identifying Extracted Value.

• Function: Run complex algorithms to detect arbitrage, liquidations, and other opportunities.
• Submission: Send transaction bundles to block builders via private channels or public auctions.
• Ecosystem: A competitive landscape where speed and algorithm efficiency are paramount.

Value Leakage occurs when economic value that could accrue to protocol stakeholders (e.g., token holders) or users is instead captured by external third parties, such as MEV searchers. Extracted Value is a direct form of leakage.

• Example: A DEX's liquidity providers losing potential fees to arbitrage bots.
• Contrast with Value Capture: Protocols like Uniswap v3 with concentrated liquidity aim to reduce leakage.
• Mitigation: Protocol-level design (e.g., CFMMs) and infrastructure (e.g., MEV-aware RPCs) can help retain value within the system.