👋Hey Nimbus Community,
Let's dive into a problem that only a small percentage of the cryptoverse is aware of✨
MEV✨ the invisible taxing problem that Ethereum and several other smart contract blockchains have to deal with.
MEV is used both by miners in PoW-based blockchains and validators in PoS networks.
It's right alongside scaling and hacks, with over $633 million already extracted since January 1st, 2021. That affects the user's experience, but it also puts pressure on the network's stability.
How does it work?Since the protocol doesn't require transactions to be ordered based on fees, miners can reorder them because they are in charge of sequencing and can decide which to include in a block and in what order.
It all starts with the use of bots and automated tools to close-monitor the blockchain. When an opportunity arises, they use different types of attacks:
▶️ Front-Running – getting a transaction executed ahead of another one because it has higher gas fees
▶️ Sandwich Attacks – they manipulate the price of a token the victim wants to buy by placing one transaction before and one after the victim's pending transaction, thus raising the price
▶️ Back-Running – they target pair listings and place a transaction right after the initial liquidity, buying as much as they can. The price goes up, and then the bot sells
▶️ Liquidations – they aim to be the first to liquidate a particular loan with front-run or back-run transactions
▶️ Time-Bandit Attacks – only miners can do this by retroactively reorganizing blocks
Multiple negative effectsBy pursuing this illegal stream of revenue, miners create significant adverse effects:
📛The user experience is diminished
📛The stability of the network is affected
📛The creation of network congestion
📛Gas prices rise
📛Transaction finality becomes questionable
So far, an efficient solution hasn't been found. In fact, some voices actually state that MEV is inevitable. Until a breakthrough is made, the invisible tax remains a problem for DeFi users that interact with automated market makers and other dApps.