MEV: The On-chain Hidden Profit Engine and Market Trap

When Ethereum completes its transition from PoW to PoS, a concept that seems to have faded away reappears in a whole new light—maximal extractable value (MEV). This is not just a change in the name of a technical term, but a true reflection of the behavioral game of participants in the entire Blockchain ecosystem.

From Miner Privileges to Opportunities for All Network Participants

In the PoW era of Ethereum, miners held an invisible “privilege”: they could decide which transactions to include in a Block and in what order. This power was once referred to as “maximal extractable value”—a concept that seems technical but actually involves the distribution of economic interests.

With the completion of The Merge in September 2022, validators replaced miners, but the nature of power has not changed. Validators still have the ability to determine the order of transactions, which means the possibility of obtaining additional profits through carefully arranged transaction sequences still exists—only now this opportunity has expanded to all participants who can discover and exploit on-chain information.

More precisely, maximal extractable value (MEV) reflects an undeniable fact: on any blockchain that supports complex transactions, the creator of the block and the organizer of the transactions may become value extractors.

The Operation Logic of MEV: Who is Making Money?

Understanding MEV requires clarifying a core question: why do block producers have such power? The answer lies in the fundamental operating principles of Blockchain.

Validators (or miners) not only need to ensure the authenticity of transactions but also need to actively select which transactions to include in the Block they create from the transaction pool. Faced with thousands of pending transactions, a natural choice is to prioritize those transactions that offer the highest Gas fees—this ensures that the validators can achieve maximal extractable value.

But this is just a superficial phenomenon.

As transactions become more complex—involving smart contracts, token swaps on decentralized exchanges (DEX), and position management in lending protocols—the power to select and order transactions evolves into a complete profit engine. A savvy block producer or transaction seeker can observe unconfirmed transactions in the transaction pool, identify arbitrage opportunities or position risks among them, and then profit from carefully arranging the transactions.

This is exactly how MEV seekers operate. They do not passively wait; instead, they actively strike out, using bots and algorithms to monitor on-chain opportunities, and then pay extremely high Gas fees to ensure their transactions are prioritized. During competitive times, these seekers may give up more than 90% of their profits to Gas fees just to execute a profitable trade before others.

Three Main Forms of MEV

The value extraction in the Blockchain ecosystem is not arbitrary, but follows several recognizable patterns:

Arbitrage operation is the most direct form. When the price of the same token varies across different DEXs, savvy traders buy at the lower price and sell at the higher price. What is the role of MEV here? When a seeker’s bot discovers this opportunity, it will immediately construct a transaction to intercept this arbitrage—by executing before other transactions, it seizes the profits that would have belonged to others.

Front-running is a more controversial strategy. Imagine a large buy order waiting in the trading pool. An observant participant can buy in themselves before this large order is executed, taking advantage of the market impact of the large order to profit, and then sell after the large order. Throughout the process, the original buyer pays the price for higher slippage.

The liquidation mechanism provides a third opportunity for MEV seekers. In lending protocols, when the value of collateral falls and leads to excessive position risk, the smart contract triggers liquidation. Who has the right to initiate the liquidation transaction? Anyone can — but those who can complete it at the lowest cost and fastest speed will earn the liquidation reward. The bots of MEV seekers are the competitors in this race.

The Dual Nature of MEV: Efficiency and Harm

The MEV phenomenon has sparked enduring controversy in the cryptocurrency ecosystem because it brings both benefits and problems.

From a positive perspective, the existence of MEV promotes a certain form of market efficiency. Intense arbitrage activities accelerate price synchronization between different DEXs, which benefits ordinary users—market pricing becomes more accurate. Liquidation activities automate and ensure reliable risk management for lending protocols, reducing the risk of bad debts for the protocols. From this perspective, MEV seekers play the role of “market correctors.”

But the cost? It cannot be ignored.

Front-running and sandwich trading (conducting a transaction before and after another transaction) directly harm ordinary users. Users experience worse prices when executing DEX swaps—because MEV seekers have already manipulated the transaction order to change the price in advance. Transaction fees have also soared: amidst the competition among MEV seekers, Gas fees have been pushed to unreasonable levels, further squeezing the profits of ordinary traders.

The most unsettling aspect is the risk at the base layer. If block reorganization can yield more than the total rewards and fees of the next block, then validators have the incentive to execute chain reorganization—reversing confirmed transactions, rearranging them, and then re-releasing them as a new block. This poses a threat to the consensus mechanism of the Blockchain.

Continuous Evolution of On-Chain Ecosystem

The phenomenon of maximal extractable value will not disappear, as it stems from the fundamental design of Blockchain—whenever there is the creation of a Block and the ordering of transactions, there exists the opportunity to extract value.

But the community is thinking about how to find a balance between protecting the interests of participants and maintaining network security. Some proposals involve changing the mechanism of transaction ordering to make it more transparent or randomized; others involve building middleware protocols to hide transaction intentions. Each of these directions has its pros and cons, and there is no perfect solution.

For ordinary users, understanding the existence of MEV is the first step. Choosing a liquidity-rich DEX, avoiding trading during high Gas fee periods, and using privacy tools—these are all practical coping strategies.

For more macro-level ecosystem participants and researchers, reaching an agreement between the market efficiency gains provided by MEV and the unfair phenomena it causes will be an important sign of the maturity of Blockchain technology.