Master Ethereum: How MEV Traders Made $675 Million

Link to Article: https://assets.ctfassets.net/h62aj7eo1csj/NYw2dyWSNeD4KEHP0R4c1/c997bba68ecdc845306eb1ff8bdf5032/GLXY_-_MEV_Whitepaper.pdf

What is MEV?

"MEV" in the context of Ethereum stands for "Maximal Extractable Value" (formerly known as "Miner Extractable Value"). It refers to the maximum value that can be extracted from block production in excess of the standard block rewards and gas fees. MEV arises from the ability of miners (or validators, in the case of Ethereum 2.0's proof-of-stake system) to include, exclude, or reorder transactions within the blocks they produce.

Why does MEV Exist?

Miners' ability to prioritize transactions based on fees is essential for protecting permissionless blockchains like Bitcoin and Ethereum from spam and denial of service attacks. Instead of relying on the altruism of miners or centralized control, these blockchains depend on the self-interest of miners, who are motivated by transaction fees to filter out junk transactions. Fees act as a deterrent against attackers flooding the network with excessive transactions. Blockchains that do not require fees, such as EOS, have experienced issues with their chains being cluttered with junk transactions.

This same mechanism that ensures blockchains are permissionless and secure also leads to the creation of Maximal Extractable Value (MEV). Miners, driven by profit, are incentivized not only to prioritize transactions with higher fees but also to exploit other lucrative opportunities beyond just transaction fees. These additional opportunities for profit can sometimes lead miners to deviate from the logic of prioritizing transactions based solely on fees.

The equitable distribution of rewards from MEV, fees, or block subsidies is crucial in maintaining the fairness and decentralization of public blockchains. If certain miners have a disproportionate advantage in earning rewards, they could become dominant in the network, leading to economic centralization and uneven wealth distribution. Therefore, it's essential to democratize opportunities to extract MEV to prevent such centralization.

MEV is particularly prevalent on Ethereum due to its account-based model and transaction execution schema, which create more opportunities for MEV compared to other public blockchains that rely on miners' self-interest to manage transactions.

MEV Extraction Methods

1. Front-Running: This involves placing a transaction ahead of a known future transaction to capitalize on the price movement that the future transaction will cause. For example, if a miner sees a large trade that will impact the price of an asset on a decentralized exchange, they can execute their own trade first to benefit from the price change.

2. Back-Running: This is the opposite of front-running, where a transaction is placed immediately after a known future transaction to benefit from the outcome of that transaction.

3. Sandwich Attacks: This involves placing transactions before and after a targeted transaction to profit from the price slippage caused by the targeted transaction.

4. Arbitrage Opportunities: Miners can exploit price differences between different decentralized exchanges within the same block.

5. Censorship: This involves selectively including or excluding certain transactions to manipulate market outcomes or extract fees.

The concept of MEV is significant because it has implications for the fairness and security of blockchain networks. Large MEV opportunities can incentivize miners or validators to behave in ways that may not be in the best interest of the network, such as reorganizing blocks or colluding with others. It also raises concerns about the centralization of mining or validating power, as those with more computational resources can potentially extract more value.

JavaScript Example Script:

const executeArbitrageTrade = async (transaction) => {
  const gasCost = await estimateGasCost(transaction);

  // Check if the gas cost is profitable based on your criteria
  if (gasCost < maxGasCost) {
    const signedTx = await web3.eth.accounts.signTransaction(transaction, privateKey);
    const receipt = await web3.eth.sendSignedTransaction(signedTx.rawTransaction);
    console.log('Trade executed. Transaction Hash:', receipt.transactionHash);
  } else {
    console.log('Gas cost is too high. Skipping trade.');
  }
};

const tokenIn = '0x...'; // Address of the token you want to swap from
const tokenOut = '0x...'; // Address of the token you want to swap to
const amountIn = web3.utils.toWei('1'); // Amount of tokenIn to swap
const recipientAddress = '0x...'; // Address to receive the swapped tokens

const transaction = uniswapRouterContract.methods.swapExactTokensForTokens(
  amountIn,
  0, // Minimum amount of tokenOut you want to receive
  [tokenIn, tokenOut], // Path of tokens to swap
  recipientAddress, // Address to receive the swapped tokens
  Math.floor(Date.now() / 1000) + 300 // Deadline for the trade (5 minutes from now)
);

executeArbitrageTrade(transaction);

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