MEV (Maximum Extractable Value) Depth Analysis: The Invisible Profits of Block Production

From miner extractable value to maximum extractable value

The concept of the maximum extractable value was not originally called by this name. In the era when Ethereum still adopted the Proof of Work (PoW) consensus mechanism, this phenomenon was referred to as “Miner Extractable Value.” At that time, miners were responsible for producing blocks, and they discovered they had a unique power: the ability to decide which transactions to include in a block, which transactions to exclude, and how to order these transactions. This power not only allowed them to earn the standard block rewards and gas fees but also enabled them to generate additional profits through the rearrangement of transactions.

In September 2022, Ethereum completed a significant technical upgrade - the Merge. The network's consensus mechanism shifted from PoW to Proof of Stake (PoS), and the identity of block producers changed from miners to validators. However, the phenomenon of gaining additional value through sorting and selecting transactions did not disappear; instead, it evolved into a broader concept: Maximum Extractable Value. This change in nomenclature reflects a reality - this value extraction capability is no longer exclusive to miners, but rather a mechanism that any participant with control over block production or transaction ordering can leverage.

The Operating Logic of MEV: Power and Choice

To understand how MEV works, it is first necessary to clarify the role of block producers in the blockchain. Whether they are the previous miners or the current validators, they bear the responsibility of protecting and maintaining the blockchain network. They verify the legitimacy of transactions and organize these transactions into blocks, adding them to the network one by one. It can be said that without block producers, new data cannot enter the chain.

This process may seem mechanical, but it entails a powerful authority—the block producers can autonomously decide which transactions should be included in the block. At its most basic level, this selection is often based on transaction fees: transactions with higher fees are prioritized. This also explains why users need to pay higher gas fees during peak congestion periods.

However, as transactions themselves become more complex—especially on blockchains that support smart contracts—the power of block producers reveals a completely different dimension. In these cases, block producers can not only choose transactions but also change their execution order or even omit certain transactions. This operational capability opens a door to additional profits for them. By carefully designing strategies for including, excluding, or reordering transactions, block producers can extract further value beyond the conventional block rewards and transaction fees.

This is the core of MEV - it is an economic game based on information and power.

Seeker: The Value Hunter Hidden Behind the Scenes

Although block producers hold direct power, the story of MEV goes far beyond them. A specialized class of network participants—known as “searchers”—also plays a crucial role in this game.

Searchers monitor blockchain networks by running specialized algorithms and bots to look for all potential MEV opportunities that can be exploited. When they discover a profitable opportunity, they do not directly manipulate block production; instead, they “bid” for priority by paying very high gas fees to block producers. Theoretically, in intense competition, block producers may even take up to 99.99% of the potential profits from searchers.

This relationship is essentially an auction mechanism. Seekers are willing to pay these high fees because their arbitrage or other strategies can yield higher returns. For example, in operations such as DEX arbitrage, seekers often convert more than 90% of their MEV income into gas fees, just to ensure that their transactions can be executed before other similar transactions.

Three Common Forms of MEV

Cross-platform arbitrage: Profit from price differences

In the cryptocurrency market, the same token may have different prices on different decentralized exchanges (DEXs). This price discrepancy creates opportunities for arbitrageurs. When arbitrageurs identify this difference, they execute a series of trades to profit from it—first buying on the lower-priced platform and then selling on the higher-priced platform.

The manifestation of MEV here is: searcher bots may monitor the pending transaction pool, and when they detect a large transaction about to be executed, they insert their own arbitrage transactions before that transaction, in order to seize the arbitrage opportunities that should originally belong to market participants. This behavior leads to market price discrepancies being eliminated more quickly, but at the same time, it causes original arbitrageurs to lose their opportunities.

Front-running and Sandwich Attacks: Abuse of Ordering Rights

Front-running trades leverage a combination of information and priority rights. When a large buy order is waiting to be executed in the pending transaction pool, a seeker or block producer can insert their own buy order before this transaction. Since their transaction is executed first, they can acquire the asset at a lower price. After the large buy order is executed and the asset price rises, they can exit for a profit.

A sandwich attack is an advanced version of front-running. The attacker places a buy order before the target transaction to drive up the price, and then immediately places a sell order after the target transaction is executed. In this way, they can profit from the bidirectional price fluctuations simultaneously - first from the price increase and then from the subsequent price decrease. Such operations clearly harm ordinary users: users will pay a higher cost due to the artificially inflated price or suffer greater slippage losses.

Liquidation Opportunity: Profit Points in the Lending Protocol

In the decentralized finance (DeFi) ecosystem, users can use crypto assets as collateral to obtain loans. When market fluctuations cause the value of the collateral to drop to a certain critical point, these positions will be automatically liquidated. The liquidation process typically involves smart contracts paying rewards or commissions to the transactions that trigger the liquidation.

For seekers of liquidation bots or block producers, this is a high-value MEV opportunity. Whoever can be the first to insert their liquidation transaction into the block will receive this reward. In highly volatile markets, these liquidation fees can amount to millions of dollars.

The Duality of MEV: Efficiency and Harm

Supporters' view: market correction mechanism

Some industry insiders believe that MEV is actually a positive force. They point out that the competitive activities of MEV searchers help to quickly correct pricing errors in the market. For example, arbitrage searchers eliminate price differences across exchanges through quick actions, making the market more efficient. Similarly, the liquidation mechanism ensures that the risks of lending protocols are managed in a timely manner—when the collateral value is insufficient, the system can take immediate action to protect the interests of lenders.

From this perspective, MEV seems to be a part of the market's self-regulation, incentivizing participants to quickly identify and correct market inefficiencies.

Concerns of Opponents: The Cost to Ordinary Users

However, the negative impact brought by MEV cannot be ignored. Front-running and sandwich attacks directly harm ordinary traders – they are forced to pay higher transaction costs, suffer more severe slippage, and even face direct financial losses in some cases.

In addition, the competition among MEV seekers can lead to a significant increase in network gas fees. When hundreds or even thousands of seeker bots compete to insert transactions into blocks, they constantly raise their gas bid, ultimately causing the overall transaction costs in the network to soar. This is an invisible tax for ordinary users—forced to pay a higher price due to the results of participating in the MEV arms race.

More seriously, in extreme cases, MEV could even threaten the fundamental security of the network. If the value that can be obtained by reordering transactions exceeds the rewards and fees for honestly producing the next block, block producers may be economically incentivized to engage in block reorganization or other destructive behaviors. This could directly jeopardize the network's consensus mechanism and data integrity.

Future Direction of Ecology

With the continuous evolution of the blockchain ecosystem, addressing the MEV issue has become a core topic for developers and researchers. The industry is exploring various solutions, hoping to retain the benefits of market efficiency while eliminating harm to ordinary users. From privacy protection technologies to innovations in transaction ordering mechanisms, as well as improvements at the protocol level, various ideas are being actively discussed and experimented with.

The phenomenon of MEV is not entirely evil, but it is by no means harmless. It reflects the issues of power and profit distribution within blockchain systems. As more users and capital enter this ecosystem, correctly understanding and managing MEV has become a necessary condition for ensuring the long-term healthy development of the ecosystem.