Draft:Maximal Extractable Value

Maximal Extractable Value (MEV) is a phenomenon in blockchain networks referring to the maximum value that can be extracted from block production, above the standard block reward and gas fees. This is achieved through the inclusion, exclusion, or reordering of transactions within a block. MEV has significant implications for blockchain economics, validator incentives, and network fairness.

Overview

MEV arises from the ability of block producers—initially miners under proof-of-work (PoW), and now validators under proof-of-stake (PoS)—to manipulate the ordering of transactions within a block. This manipulation enables several strategies, including:

Arbitrage: Exploiting price differences across decentralised exchanges (DEXs).
Front-running: Inserting a transaction before a known pending transaction to capitalise on its effect.
Back-running: Placing a transaction immediately after a known pending transaction to benefit from its impact.
Sandwich attacks: Combining front- and back-running around a victim's transaction to manipulate prices.

While MEV can increase the profitability of block production, it may cause higher fees, failed transactions, and reduced fairness for ordinary users.

Historical MEV Extraction

The scale and structure of MEV extraction have evolved alongside the Ethereum ecosystem:

2020: MEV remained a niche concept, with less than US$100 million extracted across Ethereum and related platforms.
2021: As DeFi usage exploded, MEV revenues surged into the hundreds of millions.
2022: In a down market, extraction moderated to approximately US$145 million from arbitrage and US$128 million from sandwich attacks.^[1]^[2]
2023–2024: MEV activity increased again with renewed activity in DeFi and liquid staking protocols.^[3]

Ethereum Merge and Proposer-Builder Separation

The September 2022 Ethereum Merge transitioned the network from PoW to PoS, reshaping MEV dynamics:

Before the Merge: Miners directly constructed and proposed blocks, allowing them to internalise MEV extraction.
After the Merge: Block construction was separated from proposal through a design called Proposer-builder separation (PBS). Validators now outsource block construction to competitive entities known as block builders.^[4]^[5]

PBS aims to decentralise MEV extraction, reduce centralisation risk, and increase validator optionality.

Infrastructure: Flashbots and MEV-Boost

Flashbots is a research and development organisation that emerged to create transparent and permissionless MEV markets. Its contributions include:

MEV-Geth: A modified Ethereum client used by PoW miners to receive MEV bundles via private relays.
MEV-Boost: A middleware that allows PoS validators to receive blocks from third-party builders, implementing PBS in practice.^[6]
Block builders: Actors who receive transaction order flow and construct MEV-optimised blocks.^[7]

These tools have enabled a more open and measurable MEV ecosystem, although the builder-relay system introduces new centralisation vectors.

Validator Yield Boost

MEV has become a critical component of validator earnings in Ethereum:

Without MEV-Boost: The base annual percentage yield (APY) for stakers is approximately 4%.
With MEV-Boost: Validator APY can reach around 5.69%, representing a 42% relative increase.^[8]

This "MEV yield" incentivises validators to participate in MEV markets via MEV-Boost relays, shaping the economic layer of PoS Ethereum.

Layer 1 vs. Layer 2 Considerations

MEV extraction mechanics differ significantly between Layer 1 and Layer 2 networks:

Layer 1 (Ethereum Mainnet): Extraction is distributed among independent block builders and relays, with Flashbots dominating the landscape.
Layer 2s (e.g., Arbitrum, Optimism): Often rely on centralised sequencers, who can fully capture MEV by controlling transaction ordering. However, some L2s are exploring decentralised sequencer designs to democratise MEV.^[9]

The concentration of MEV on L2s raises concerns about fairness, transparency, and censorship resistance.

Ethical Concerns and Future Directions

MEV extraction poses several risks:

User harm: Practices such as sandwiching increase costs and reduce the success rate of ordinary users’ transactions.
Centralisation: MEV concentration among a few builders and relays may threaten decentralised consensus.
Lack of consent: MEV profits are typically extracted without users’ knowledge or consent.

Mitigation strategies under development include encrypted mempools, fair ordering protocols, and the eventual integration of PBS natively into Ethereum protocol layers (e.g., via EIP-4844 and Danksharding proposals).

References

^ "How Big is the MEV Market? A Data-Driven Exploration of MEV Scale and Future Growth". 2023.
^ "MEV Outlook 2023: Walking Through the Dark Forest". 2023.
^ "How Big is the MEV Market? A Data-Driven Exploration of MEV Scale and Future Growth". 2023.
^ "A Guide to MEV in Post-Merge Ethereum". Outlier Ventures.
^ "Ethereum Merge – What Changed and What's Next?". Nuant.
^ "Flashbots MEV-Boost".
^ "Flashbots Docs – Block Builders".
^ "Ethereum Staking Rewards ROI Calculator". Blocknative.
^ "Ethereum MEV Overview". ethereum.org.

External Links

[1] "How Big is the MEV Market? A Data-Driven Exploration of MEV Scale and Future Growth". 2023.

[2] "MEV Outlook 2023: Walking Through the Dark Forest". 2023.

[zenmev-3] "How Big is the MEV Market? A Data-Driven Exploration of MEV Scale and Future Growth". 2023.

[4] "A Guide to MEV in Post-Merge Ethereum". Outlier Ventures.

[5] "Ethereum Merge – What Changed and What's Next?". Nuant.

[6] "Flashbots MEV-Boost".

[7] "Flashbots Docs – Block Builders".

[8] "Ethereum Staking Rewards ROI Calculator". Blocknative.

[9] "Ethereum MEV Overview". ethereum.org.

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