What is MEV?

What is MEV?

Maximal Extractable Value (MEV) refers to the maximum value that can be extracted from transaction ordering, inclusion, and censorship during block production. This value arises from the ability to control which transactions get included in a block and in what order.

MEV in Practice

When a user submits a transaction, it enters the mempool (a public pool of pending transactions). Miners and validators can see these transactions before they're included in a block. This visibility creates opportunities to profit by:

• Reordering transactions to their advantage
• Adding their own transactions before profitable ones
• Censoring transactions to reduce competition
• Front-running large trades to capture arbitrage opportunities

Types of MEV

MEV opportunities come in various forms, each with different characteristics and profit potential. Understanding these types is crucial for developing effective MEV strategies.

Frontrunning

Frontrunning occurs when an attacker sees a profitable transaction in the mempool and submits their own transaction with a higher gas price to be included first, thus profiting from the anticipated price movement.

How Frontrunning Works

// 1. Attacker sees large buy order in mempool
// User transaction: Buy 100 ETH @ $2000
// Estimated price impact: +$50

// 2. Attacker submits frontrun transaction
const frontrunTx = {
  to: UNISWAP_ROUTER,
  data: swapExactTokens(
    100000, // Sell 100k USDC
    95,     // Min ETH output (25% less than expected)
    [USDC, ETH],
    attacker,
    deadline
  ),
  gasPrice: "200000000000" // Much higher gas price
};

// 3. Attacker gets filled first, pumps price
// 4. User's order gets filled at worse price
// 5. Attacker immediately sells ETH for profit

Sandwich Attacks

Sandwich attacks involve placing transactions immediately before and after a target trade, manipulating the price to extract value from the victim's slippage tolerance.

Attack Mechanics

Arbitrage MEV

Arbitrage opportunities arise when the same asset is priced differently across decentralized exchanges. MEV searchers identify and exploit these differences through rapid execution.

Arbitrage Process

// ETH Price Discrepancy Found
// Uniswap: 1 ETH = $2,000
// SushiSwap: 1 ETH = $2,050

// Arbitrage Strategy
const arbitrage = {
  buyExchange: 'Uniswap',
  sellExchange: 'SushiSwap',
  asset: 'ETH',
  volume: 100, // 100 ETH
  profit: (2050 - 2000) * 100 - gasCost, // $5,000 - gas
  execution: 'simultaneous' // Critical for success
};

Liquidations

When borrowers' positions become undercollateralized due to price movements, their positions can be liquidated. MEV searchers compete to execute these liquidations to earn liquidation rewards.

Liquidation Process