After The Merge, the biggest update in Ethereum history, the Maximum Extractable Value (MEV) is still here with some changes. It transitioned to a MEV-Boost system, which was made for the Proof-of-Stake algorithm. What is MEV and MEV-Boost? Let’s find out!
The Maximum Extractable Value refers to the profit that miners or validators can make due to the ability to include and exclude transactions or change their order before approving a new block on the network.
Let’s see how it works on the example. Imagine that someone wants to buy a token on a decentralized exchange, which creates opportunities for arbitrage trading. The first one who manages to close this deal, receives a reward. In the traditional financial system, a similar process is called front-running. Those who find opportunities for receiving Maximum Extractable Value and make transactions based on them are called “searchers”. According to analytics, arbitrage generates over 90% of MEV-related revenue.
For instance, a user decided to exchange 10,000 USDC for ETH at a price of $2,000 per coin in the DEX’s USDC/ETH liquidity pool. Here's what happens after a trade request will be placed:
- the mempool has special bots that track unconfirmed transactions and collect various data from DeFi applications, including prices and liquidity volumes;
- after noticing the user's intention to buy ETH, the bots will initiate an operation that will increase the price right before the user's transaction is executed. For example, a bot can add more stablecoins to the USDC/ETH liquidity pool to increase the price of the cryptocurrency;
- the expected price of $2000 per ETH will change to $2500 per coin, for example. The transaction will be completed and instead of 5 ETH, the user will receive 4 ETH. The profit of the initiator of this MEV operation will be 1 ETH minus the cost of commissions.
Because MEV results in higher fees for the user, it is also referred to as an “invisible tax”, which is not unique to Ethereum.
The biggest update in the history of Ethereum - The Merge - did not put an end to MEV at all. A modified MEV-Boost system was developed, adapted for the Proof-of-Stake (PoS) algorithm.
A few days after the update, developer Elias Simos analyzed the first 24,000 Ethereum blocks. He concluded that 18% of them were generated using the Maximum Extractable Value, providing additional staking rewards to validators. Thanks to MEV-Boost, validators using it were able to get 122% more profit. The blocks they generated contained 41.4% more transactions.
Moreover, MEV-Boost made it possible to eliminate empty blocks. Among the validators that did not use this functionality, the analyst found 1.2% of cases.
The modified system was created by the Flashbots. New MEV works like this:
Source – screenshot ethresear.ch
- The Builder API is a modified version of the Engine API used by Beacon Chain nodes to connect execution clients responsible for creating blocks, as well as consensus clients that propose blocks.
- Block builders invest in the specialized equipment required for block production. By receiving transactions from seekers, they “form the most profitable block using various strategies.”
- Relayers validate blocks before passing them to validators. They also value the MEV reward and protect the network from spam.
- The escrow receives the contents of the block from the relay, making the data available to the validator.
The amount of MEV continues to grow due to the development of the DeFi segment. Some members of the crypto community are concerned that this segment is dominated by a small number of trustworthy relayers. However, the update of this system in the Ethereum blockchain allowed to make MEV-opportunities available to solo-stakers as well; to reduce the cost of gas; to increase the level of privacy for Ethereum users.