Miner Extractable Value is no longer just a theoretical concept.
Some Ether (ETH) miners appear to be re-engineering blocks to take advantage of DeFi opportunities in an instance of what is termed “miner extractable value,” or MEV.
Miner extractable value was long anticipated by researchers as a potential exploit pattern for DeFi that leverages the miners’ unique protocol influence. Since miners have free reign over what transactions to include and in which order, this opens the way for several exploitation techniques for on-chain decentralized finance.
Anonymous researcher Frank Topbottom highlighted several convincing instances of MEV in the wild, in what is likely to be the first time these activities have been noticed by the public.
He noted several cases of suspicious transactions mined by major pools like SparkPool and F2Pool. These were often initiated by a small set of addresses and appeared first in blocks despite having a lower gas fee than others below. The behavior is not immediately explainable by “legitimate” activities like miner reward distributions. But it is also unclear what is the purpose of these transactions.
A more evident case of MEV can be observed with transactions from some minor pools, with Topbottom citing 2Miners, Minerall Pool and EzilPool, which hold about 2% of total hashrate.
One of the transactions in question presents several features that point to miner value extraction. The first clue is that its fee is effectively zero — just two Wei. This should not be confused with Gwei, or one billion Wei. The Wei is the smallest monetary unit of Ether, equal to a billionth of a billionth of Ether.
Two Gwei would be suspicious enough in today’s Ethereum fee market, but a two Wei fee transaction is unlikely to ever be confirmed at all. In reality, it was confirmed in just 17 seconds.
The second clue is that the transaction is an arbitrage trade that netted its sender about $70 out of a commitment of $2,800. Such a trade would never be profitable with today’s gas fees, hence existing arbitrage traders ignored the opportunity. While it is unclear who is the culprit behind this transaction, it is virtually impossible that this was done without assistance from miners.
Topbottom noted that in this case, the transaction made the market slightly more efficient by balancing out prices where others were unable to. But the miners’ power can go far beyond that.
Due to their power to reorder transactions at will, miners can front-run every single non-miner. This can be used to beat everyone else to arbitrage trades, auction liquidations and token offerings, among others.
There are benefits to this power, Topbottom noted. Miners could be the most efficient keepers, which would help avoid situations like Maker’s $0 collateral bids going through on Black Thursday. The flip side is that miners could send their own $0 bids and block legitimate auction participants altogether. This is incredibly unlikely as it would require collusion from all miners for extended periods of time, but the theoretical possibility highlights the power that miners hold.
A more realistic scenario is miners competing for high-value MEV, which would incentivize them to cause chain reorganizations to steal the “loot” from others. This would be extremely destabilizing to average users who would see their transactions deleted from the chain after confirmation.
Preventing miners from extracting value from DeFi is extremely difficult, as these actions do not go against consensus rules. It is also worth noting that this is not unique to Ethereum proof-of-work miners. Stakers in Ethereum 2.0 would have the same power, provided that the blockchain’s general architecture remains the same. Operators of some layer two solutions would also be able to front-run their users.
A potential solution being studied is auctioning MEV, which would formalize the behavior and “sell” the right to reorder transactions at will.