In an ocean of acronyms, MEV has risen as one of the most relevant in recent times, thanks, in part, to the evolving role of miners and their incentives, especially in the Ethereum blockchain post-London hard-fork.
MEV stands for either Miner Extractable Value or Maximum Extractable Value. It is defined as the value some actors of the crypto space can obtain by benefitting from their privileged position in the blockchain processing sequence.
In other words, it is the money miners can make by deciding the order of transactions in the block validation process. It can, and has been interpreted, as a fair way of earning money for miners, a process that brings balance to the market, by arbitraging and compensating for inefficiencies, but also as a potential risk.
How do transactions work?
The mempool is the queue where valid transactions wait for miners to compose a block with them right before start the validation process. Traditionally, it was the fees that determined the order in which transactions were allowed in. But miners realized that occasionally there was money to be made manufacturing arbitrage opportunities, just by creating and reordering transactions in their block.
The most common form of MEV seen today is third-party bots performing arbitrage between two or more decentralized exchanges (DEXs). An arbitrage opportunity is created when the price of a crypto asset on one exchange deviates from another, typically caused by a large trade on one of the exchanges. Arbitrage bots profit from this opportunity by purchasing an asset on the exchange offering a lower price and selling it on the exchange offering a higher price, bringing both exchange prices back to an equilibrium while earning a profit . Chainlink
MEV can take many forms, some with fancy names such as “sandwiching” or “uncle bandit.” But in the end, it is a practice that questions the theoretical incentive to order blocks by fees or tips. It has been defined as a malpractice that artificially alters the unwritten rule that determines how to order transaction, and creates a negative situation for regular users who are either scammed or affected by increases in fees.
MEV used to stand for Miner Extractable Value because it described what miners could do with privileged information. Some are trying to change the M to Maximal, just because it´s no longer only miners playing the game. Anyone with access to the mempool can do it, and many people are. Some groups in the crypto-space are looking into ways of making this practice more transparent and accountable. Flashbots, a community of developers, leads the way by shedding light on the issue and making it transparent to the community.