💰 Understanding Maximal Extractable Value (MEV) in Crypto
💡 Maximal Extractable Value (MEV) is a concept in blockchain networks referring to the ability of miners and validators to profit by strategically reordering, including, or excluding transactions within a block. This "invisible tax" often surpasses standard block rewards and transaction fees, optimizing profitability for those who control block creation.
How MEV Extraction Works-
🟢 When a user submits a decentralized finance (DeFi) transaction, it enters the mempool, a public waiting area for pending transactions. Block producers (miners in PoW and validators in PoS) can prioritize transactions based on profitability rather than standard fees, creating opportunities for additional gains through various MEV strategies.
🎲 Common MEV Strategies-
- Front-running: Inserting a transaction before a target transaction to profit from its market impact by paying higher gas fees or colluding with block producers.
- Sandwich Attacks: Surrounding a target transaction with two of the actor’s transactions—executing a buy order to drive up the price, allowing the target transaction, and then executing a sell order to capitalize on the increased price.
- DEX Arbitrage: Exploiting price discrepancies across different decentralized exchanges (DEXs) by buying tokens at a lower price on one exchange and selling at a higher price on another.
- Liquidations: Competing to perform liquidations in DeFi lending protocols when collateral values drop, earning rewards for speed and priority.
⚪️ To protect against MEV attacks, users can leverage tools like Oasis’ default-MEV protection and hidden mempool, which shield transaction data from bad actors. Integrating the Oasis Privacy Layer allows for private message and asset transactions, providing additional protection from unauthorized access.
