Miner Extractable Value (MEV) is a strategy that miners can use to earn more money when validating transactions. It works by reordering, including, or excluding transactions in a block.
When a transaction is sent, it waits in a queue with other transactions, and miners can choose which transactions go into the next block of the blockchain.
Some transactions have higher tips, which allows miners to earn more money by choosing those first. It’s like picking the biggest candies out of a bag. While this helps miners earn more, it can sometimes make the system less fair.
Additionally, this approach has some issues that have a major impact on decentralization, blockchain security, and overall network performance.
The problem with MEV
MEV is derived from the fact that miners and validators occupy a unique position in the blockchain. Since they can control the order of transactions in a block, they can engage in front-running, which involves inserting transactions before pending ones in order to take advantage of projected market movements. Another common tactic is sandwich trading, which involves placing buy and sell orders around a huge transaction to manipulate the price of the asset.
When it comes to lending platforms, miners have the opportunity to make money using the MEV method. Through lending platforms, users can borrow and lend cryptocurrencies via smart contracts. In some cases, borrowers will not have enough collateral to back their loans, this is called being “underwater.” When this happens, the loan must be liquidated, meaning the remaining collateral is sold to repay the loan.
Miners can use the MEV method to benefit from liquidations in the following way: when a loan needs to be liquidated, anyone can step in and liquidate the loan. This is usually done by “searchers,” users or bots that constantly scan the blockchain for loans that need liquidation. Once a searcher finds an underwater loan, they rush to be the one to liquidate it because they get a reward for doing so.
Researchers compete to be the first to liquidate these positions, and they do this by trying to get their transactions included in the next block as quickly as possible. To improve their chances, they may even pay higher fees to miners, hoping that the latter will prioritize their transaction over others.
This race to liquidate transactions by researchers has some drawbacks, however. First, it can increase costs for all parties involved, as protocols may have to pay higher fees and regular users may have to face higher transaction costs (due to the higher fees researchers pay to prioritize their transactions over others).
Additionally, this strategy reduces overall fairness because only users with high computing power and resources can consistently benefit from this method. This centralizes the benefits in the hands of a few powerful actors, which goes against the decentralized nature of blockchain technology.
MEV isn’t just theoretical. On Aave and Compound on Ethereum, nearly $150 million in liquidation incentives have been paid to miners rather than protocols or their users. This is what MEV does to operational costs and user experience in DeFi.
Existing approaches to mitigating problems associated with internal combustion engine vehicles
To address the MEV problem, various solutions have been developed. One such solution is Flashbots’ MEV-Boost which attempts to mitigate MEV through private transaction ordering. Flashbots allows researchers to bid for transaction inclusion directly to miners, reducing the chaos for block space and associated costs. This has been shown to reduce some inefficiencies, but the underlying MEV mining problem remains.
Pyth Network, which provides real-time market data for on-chain applications, recently launched Express Relay. This new service eliminates MEV and reduces costs for DeFi protocols and users. Powered by the Pyth DAO, Express Relay connects DeFi protocols directly to a network of researchers via protocol-controlled auctions for high-value transactions like liquidations.
Express Relay works by conducting off-chain priority auctions where miners bid for the right to perform high-value transactions. This bypasses the ability of miners to mine MEV by not being in the middle of determining the order of transactions. By centralizing and aggregating transaction opportunities across multiple protocols and blockchains, Express Relay eliminates the time and cost of negotiating and integrating with individual protocols.
Express Relay has many benefits, including reducing operational costs for DeFi protocols so they can allocate resources more efficiently. This means lower costs for users and a fairer DeFi ecosystem. Express Relay also enables faster deployment of new protocols by providing a pre-integrated network of researchers so they can jumpstart their liquidation needs.
Several DeFi protocols including Synthetix, Zerolend, Ionic, and others have already integrated with Express Relay and are seeing major benefits. They have seen significant cost savings and performance improvements. Protocol developers have stated that Express Relay is quite easy to integrate with and have made their protocol more efficient.
Another solution is Chainlink’s Fair Sequencing Services (FSS). Chainlink’s FSS focuses on fair transaction ordering to avoid front-running and other MEV strategies. It provides a fair and transparent transaction sequencing mechanism so that transactions are processed in the order they are received and cannot be reordered by miners or validators for profit.
The benefits of using Chainlink FSS are numerous, for example, it increases transaction fairness and transparency and a more decentralized and fair DeFi ecosystem. Several protocols have already used Chainlink FSS to process transactions and it works to mitigate MEV issues.
The Future of DeFi Without MEV
Widespread adoption of these solutions could change the landscape of DeFi. By eliminating or reducing MEV, these solutions increase fairness and decentralization, two of the core tenets of blockchain. Reduced operational costs and better user experience are the immediate benefits, but the long-term implications are even greater. A MEV-free DeFi ecosystem can lead to more innovation and competition between protocols and a more diverse financial landscape.
Miner extractable value (MEV) creates big problems for DeFi, including costs, fairness, and decentralization. But solutions like Pyth Network’s Express Relay and Chainlink’s Fair Sequencing Services (FSS) are the way to mitigate these issues. By removing the extractive role of miners in the ordering of transactions, these solutions will enable a more efficient, fairer, and more competitive DeFi. As the blockchain and DeFi space advances, the adoption of these solutions will be critical to the sustainability and growth of DeFi.
The war on MEV is not over, but Express Relay and Chainlink FSS are a big step in the right direction. These solutions show that technology can solve complex problems and make DeFi better for everyone. By embracing these solutions, the DeFi community can look forward to a world where fairness, transparency, and efficiency are the new norm and new opportunities for growth and innovation in DeFi.
