The Bank for International Settlements has released the latest information on the “extractable value of miners” by intermediaries of cryptocurrencies and decentralized financial transactions. In BIS Bulletin, the author describes the problems this poses.
International Organization of Securities Commissions (IOSCO) Report on DeFi. This represents IOSCO’s general concerns about the risks associated with DeFi, including the “extractable value of miners” (MEV)risk.
What happened?
According to BIS Bulletin, MEV is defined as:
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MEV risk occurs in the DeFi market because transactions are largely unregulated and validated by intermediaries who are free to choose the order of transactions to be validated. DeFi generally refers to financial activities that utilize distributed ledger technology (such as blockchain) to operate in a decentralized way. Users execute transactions on DeFi products such as cryptocurrencies by sending them to a pool of pending transactions (also known as “mempools”) that are validated by an intermediary. When a miner includes a transaction in a block that it adds to the blockchain, the transaction is validated.
Since the miner is free to select and order the transactions to include in the block, the miner can select and order the transactions in a way that maximizes profits for the miner’s own profits. Such values are called MEVs and are obtained at the expense of other market participants.
What is an example of a MEV strategy?
In BIS Bulletin and its appendices, the author describes various MEV strategies. Each strategy is briefly summarized below.
Front running
If the miner observes in a block a large pending transaction that may affect the market price of the cryptocurrency it is targeting, the miner will own just before the large pending transaction. You can add purchase or sale transactions for. Miners put their profits in their pockets by selling at a high price before a large transaction lowers the price, or by buying at a low price before a large transaction raises the price.
Back running
This strategy is similar to front running, but miners instead add their own transactions immediately after large transactions. According to the author, this could involve buying new tokens immediately after being listed, for example with an automated strategy from multiple addresses to manipulate prices.
Sandwich attack
At BIS Bulletin, the author provides an example of a MEV strategy known as a “sandwich attack.” It “sandwiches” a user’s transaction in a crypto asset between two transactions of the miner himself to buy or sell within the block, and takes advantage of the changes in the market price of the crypto asset caused by that user’s transaction. Occurs when. ..
Decentralized Exchange (“DEX”) Arbitrage
The DEX strategy is implemented by taking advantage of the price difference of the same crypto assets in different DEXs, buying crypto assets at a lower price in one DEX and then selling them at a higher price in another DEX.
Liquidation
Loan agreements can be built on the blockchain using smart contracts (known as “loan protocols”). The type of lending protocol used by miners for MEVs is an arrangement in which a borrower posts crypto assets as collateral for borrowing assets from a lender. If the value of the collateral falls below the minimum threshold, the loan may be “liquidated”. That is, an actor (called a “liquidator”) may repay a loan and collect a large amount of liquidation fees or collateral from a defaulting borrower. .. Miners use clearing strategies by looking for unhealthy lending protocols and acting as clearers.
Replay attack
Miners can extract MEVs by duplicating and front-running the victim’s transaction (roughly speaking, observing the transaction, submitting a duplicate version of that transaction, verifying the duplicate version, and from the transaction. By putting the profit in your pocket).
Time bandit attack
According to the author, a time bandit attack occurs when a miner rewrites the blockchain history to steal funds already allocated by smart contracts in the past. The authors state that such attacks can effectively cancel transactions already recorded in the ledger, which can be particularly damaging to the integrity of the ledger.
The author also notes that there are other new strategies.
What’s next?
According to the author, an estimated $ 550- $ 650 million worth of MEV has been extracted on the Ethereum network since 2020. MEV is incompatible with the idea of decentralization, which limits the usefulness of DeFi applications and negatively impacts users. Includes additional charges and higher unpredictability. In addition, miners who are not engaged in MEV can be crowded from the market as their operations are relatively uneconomical.
According to BIS Bulletin, there is an open question as to whether the current regulations on insider trading traditionally applied to financial markets can be transferred directly to MEV, and regulators around the world have been able to extract value by miners. You need to know if it constitutes an illegal activity. The author can also address MEV and related issues with “permitted” distributed ledger technology that relies on a network of trusted intermediaries who may be held liable because the identity is publicly available. It states.
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