The “extractable value of miners” or MEVs and their effects are one of the secrets of the industry. And the Bank for International Settlements recently said,Miners as intermediaries: Cryptocurrencies and extractable value and market operations in DeFiExplain the phenomenon and the risks it means. In it, they define MEV as “the profit that miners can get from other investors by manipulating the selection and ordering of transactions added to the blockchain”.
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This paper focuses on the Ethereum blockchain. How popular is the practice over there? “MEVs are so popular that one in thirty transactions may be added by a miner for this purpose.” Wow, that’s a lot. How much do the participating miners earn? “According to two recent estimates, total MEV is estimated to be US $ 550-650 million for the Ethereum network alone since 2020.” “These estimates are the largest protocol. Because it is based, it can be underestimated. “
Operation is not yet illegal
This is why MEV is concerned about you. “This profit not only sacrifices other market participants, but the miner’s trading delays other legitimate trading.” But how does this operation make a profit?
“By manipulating market prices through specific orders or censoring of pending transactions. The ledger is publicly observable, even if the underlying identity of the miner or other party in question is unknown. , You can see these forms of market manipulation. “
In a wise blockchain, “Theoretically, miners should select and order transactions based solely on fees.” However, this is not the case. This is very easy. “Several different users trade in mempool and miners can choose which orders to include in this block.” Under this paradigm, “trading is not ordered based on fees, but for miners.” It is ordered based on the opportunities for profits generated. “
If this sounds terrible and destroys your trust in the system, it should be. But it’s not illegal yet. The mechanism is as follows.
“Therefore, MEVs can resemble illegal front running by brokers in traditional markets. If a miner observes large pending transactions in mempool that can significantly fluctuate market prices, this You can profit by adding a corresponding buy / sell transaction just before a large transaction. From price fluctuations. “
Is this all legal? It’s not perfect, but it’s not particularly illegal.
ETH price chart for 06/17/2022 on FTX | Source: ETH/USD on TradingView.com
MEV problem
First of all, “I have some open questions about whether the current regulations on insider trading can be transferred directly to MEV.” Why? Because, “in contrast to traditional markets, anyone who participates in such an ecosystem essentially accepts the rules encoded in that protocol.” If the code is law, the MEV It doesn’t matter.
However, the code can be legal to the user. Regarding authorities, the BIS said, “Regulators around the world believe that miners need to make sure that value extraction is illegal. In most jurisdictions, activities such as front running are illegal. At the time of this writing, “bots” that abuse MEV are active on various decentralized exchanges. “
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In addition, BIS believes that “MEV poses a typical problem for the industry itself because it conflicts with the idea of decentralization.” How does it do it, BIS? “Decentralized governance of blockchains can be useful in certain unreliable settings, but at a considerable cost in terms of user and allocation efficiency.” Well, maybe smart contract-enabled blockchains do. It is a thing. This has nothing to do with Bitcoin.
What is a BIS solution? They argue that “MEV and related issues can be addressed with authorized distributed ledger technology based on a network of trusted intermediaries whose identities are open to the public.” Wait, what? Legacy systems are allowed and IDs are public, but why connect and recreate inefficient blockchains?
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