#CryptoExplained: Maximal Extractable Value

Have you noticed how flight ticket prices soar during peak times, Google ad searches give priority to paid advertisements, and Uber charges more when demand spikes? This phenomenon of capitalizing on superior knowledge or speed is present in the cryptocurrency world as well, where it’s termed Maximal Extractable Value (MEV). In this space, those constructing the blocks of a blockchain play a pivotal role, akin to service providers in other domains.

The Crypto Supply Chain  

Cryptocurrencies aren’t merely about exchanging virtual coins; they’re essentially about trading blockspace. Every crypto system, therefore, aims to extract the maximal value from each block. Imagine a block as a parcel of land. Infrastructure providers for cryptocurrency, much like real estate developers, endeavor to populate this land with the most lucrative developments possible.

A transaction’s journey starts with a user’s intention. Post its initiation and execution via a wallet, it lands in a node’s mempool. Envision a sea of anonymous individuals, each representing a node. Initiating a transaction is akin to whispering its details to the closest individual. That person’s recall capacity mirrors the mempool.

Expanding on this analogy: the whispered transaction gets relayed from one person to another until everyone is aware of it. In reality, on blockchain networks, transactions disseminate to global nodes, a process that can take from mere seconds to several minutes. This decentralized method of information spread is termed the gossip protocol.

Different blockchains form blocks with varied objectives, be it security, MEV, or speed. Most demand that nodes assimilate transactions into blocks to construct a block of value. Drawing from our analogy, think of transactions as offering a fee relative to their value. People (or nodes) naturally gravitate towards the heftiest transactions, recording them on their ledger pages.

With thousands of ledger pages or blocks created, which one gets selected? The answer hinges on the specific cryptocurrency. In Bitcoin’s case, it’s the fastest mined block, while Ethereum relies on Validators for block selection and attestation. Irrespective of the method, the lure of selecting the most profitable blocks is compelling.

Extracting Maximal Value

Crypto infrastructure providers can manipulate transaction inclusion in a block, thereby magnifying their MEV. Strategies like frontrunning or even the sandwich attack, recently witnessed on Ethereum, enable them to maximize their MEV.

These providers wield significant power due to their advanced visibility into impending block transactions. In Ethereum, this mempool visibility provides a 12-second edge, while in Bitcoin, it’s up to 10 minutes. For those involved in Ethereum, this scenario mirrors high-frequency trading—acting the fastest reaps the most rewards.

Frontrunning  

Frontrunning offers a prime example. Originating from stock market traders who capitalized on large order-triggered price fluctuations by placing their orders first, the term has found its place in crypto. With Ethereum’s 12-second advantage, infrastructure providers can assist hedge funds in preempting larger orders, thereby leveraging the subsequent price shifts.

In an ever-evolving digital landscape, the dynamics of cryptocurrency operations mirror traditional financial markets in intriguing ways. MEV, with its deep-rooted principles in extracting the utmost value, underscores the competitive edge that knowledge and speed offer in both realms. As cryptocurrency continues to mature, understanding such nuances becomes crucial. It’s not just about trading coins, but recognizing the intricate web of incentives and strategies that propel this revolutionary financial frontier forward.