From cointelegraph by Pavel Nikienkov
Satoshi Nakamoto is a genius, but when it comes to privacy, he left the door wide open. Now, the vultures are feasting. The original blockchain and its many descendants are transparent, immutable, and decentralized. That might sound like everything you ever wanted from a financial system, but you’re wrong.
Privacy is a vital component of any secure financial system. There’s an inherent contradiction between blockchain technology and privacy. The desire for privacy is essential, and the right to be forgotten is enshrined in law. Still, blockchain technology violates this principle with its very existence because it’s an infusible, yet permanent and public, data ledger.
Maybe you don’t care because the only information that anyone can see is a string of random letters and numbers, however, this has real-life implications for transactions on the chain.
Consider a potential example: You go to Uniswap to buy a token, place your order, execute…and receive significantly less of the token than you expected. You check the pair’s order history and find that a large buy was made just before yours, pushing the price up, with a hefty sell following after your order went through. You’ve just been “front-run,” and probably not for the first time.
Front-run? You might think: “I was an ace runner in school; no one’s beating me!” Let’s take a step back and explain what front-running is.
What is MEV?
Maximal extractable value (MEV) refers to the maximum value a blockchain miner or validator can make by including, excluding or changing the order of transactions during the block production process.
Blockchain networks are immutable ledgers secured by a decentralized network of nodes known as “block producers.” In proof-of-work blockchains, this means miners. For proof-of-stake networks, this refers to validators. The block producers are responsible for regularly aggregating pending transactions into blocks, which are then validated by the entire network and appended to the global ledger. While blockchain networks ensure all transactions are valid (e.g. no double-spends) and new blocks of transactions are continually produced, there isn’t a guarantee that transactions will be ordered as they were submitted to the blockchain.
As each block can only contain a limited number of transactions, block producers have complete autonomy in selecting which pending transactions are in the mempool. In this memory pool, block producers store unconfirmed transactions offchain, which they will include in their block. As a result, block producers have full autonomy to engage in rent-seeking behavior by extracting MEV with impunity. For instance, the cumulative value of MEV extracted on Ethereum reached $78 million in early 2021, which then shot up to $554 million by the end of the year. MEV extracted on Ethereum now stands at over $600 million.