2023-05-06 08:14:10
MEV, i.e. Maximum Extractable Value (maximum extractable value) is a concept used in the world of traders, which refers to how much profit can be extracted in total from arranging the order of transactions within a block, or from the resulting arbitrage opportunities. The vast majority of such opportunities are available on Uniswap and similar decentralized exchanges (DEX).
Even on a traditional stock exchange, the sequence of transactions plays a decisive role in determining the price: just think of quant traders, who put a lot of emphasis on placing their servers geographically close to the stock exchange, thus increasing the chance of submitting their orders faster than their competitors . The problem is also very well known on the Ethereum blockchain, since anyone who has traded with high-volume pairs on Uniswap knows exactly that in addition to technical analysis, trading bots and other factors that manipulate trading must also be dealt with. Basically MEVs four types are distinguished.
1. Internal MEV
The essence of the internal MEV is that it does not try to manipulate the transactions of an entire blockchain, but only the transactions of a specific application. It’s a classic example atomic arbitrázs his tactic, which when he sees a price difference between two exchanges, he places a buy order on one trading platform and a sell order of the same amount on another trading platform, and the goal is to make a profit between the two.
2. CeFi-DeFi MEV
CeFi (centralized financial applications, e.g. Binance, Nexo) vs. DeFi (decentralized financial applications, e.g. Uniswap, GMX) MEV also uses a form of arbitrage that exploits the differences between centralized exchanges and decentralized financial applications. The price of an asset usually updates faster on centralized exchanges than on-chain pools and decentralized exchanges can track price movements, so bots can quickly trade the difference.
3. Interchain MEV
Interchain MEV takes advantage of the property of blockchains that most blockchains work separately from the others, i.e. by default they do not see what is happening on other blockchains. For example, the Bitcoin network is not built to monitor transactions on the Ethereum blockchain, but at the same time BTC running on the Bitcoin chain and wBTC transactions registered on the Ethereum chain affect each other.
Interchain MEV is a good option for traders who use their speed to adjust the price between blockchains. If, for example, an ETH changes hands for $1,950 on the Ethereum chain, but the exchange rate on the Binance Smart Chain is 1,930, then someone will immediately jump on it and perform the arbitrage either through a bridge between the two blockchains or using decentralized exchanges .
4. Sovereign MEV
Communities on different blockchains may attempt to set up their own protocols to regulate MEVs. This might include, for example, banning certain MEV tactics or punishing validators who violate etiquette. Especially in the world of Ethereum, there is a lively discourse regarding the importance of this.
MEV is inevitable
Even the founder of Ethereum, Vitalik Buterin, admitted that the phenomenon of MEV will always exist on Ethereum. Validators can always select transactions offering higher gas fees – even if these transactions were obviously submitted to “pull down” a transaction submitted with a lower gas fee. The development of Sovereign MEV practices might provide an opportunity to curb market weaknesses and the exploitation of other users, but this is not necessarily in everyone’s interest.
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