Tell Me, What Really Is MEV?
MEV (Miner/Maximal Extractable Value) has been a buzzword in the blockchain space for quite some time now. It is often discussed as some sort of dark magic that only experienced blockchain developers can understand and perform. However, at its core, MEV is not that complicated to grasp, it is, however, confusing what it really encompasses.
The term MEV is often used to describe the activity of bots doing arbitrages on the blockchain. But traders have been doing arbitrages for hundreds of years and they never needed a fancy term like MEV to describe it, so what’s the difference really? Is all MEV arbitrage? Is all arbitrage MEV?
In what follows we will try to give some precise answers and define what MEV really is.
On the Definition of MEV
“Flashboys 2.0" or the first apparition of MEV
MEV or Miner Extractable Value, as first defined in Flashboys 2.0, is a term used to describe the “value that is extractable by miners directly from smart contracts as cryptocurrency profits. One particular source of MEV is ordering optimization (OO) fees, which result from a miner’s control of the ordering of transactions in a particular epoch. PGAs and pure revenue opportunities provide one source of OO fees”. As you understand, the context is a PoW blockchain. As of when Etherean was still a PoW network, a simple example would be:
- a trader sends a transaction on Uniswap and moves the price from 1.12 to 1.14
- on another DEX the price is still 1.12
- an arbitrageur sees the opportunity and sends 2 txs to exploit this arbitrage, he pays a bribe to the miner to be at the front of the next block and be sure to get the profit
That’s in PoW, and in PoS, we just replace the Miner by the Validator.
Note that Flashboys definition states that Ordering Optimization Fees, as in the bribe MEV searchers pay to be able to influence the order transactions get executed in, is one source of MEV, but not all of it.
The Flashbots definition
Flashbots took that definition but implied that MEV was solely extracted from transaction ordering: “MEV is a measure devised to study consensus security by modeling the profit a miner (or validator, sequencer, or other privileged protocol actor) can make through their ability to arbitrarily include, exclude, or re-order transactions from the blocks they produce.” (source)
There is really a focus on transaction (re-)ordering, which to me makes sense, because arbitrage without the transaction ordering part, is… just classical arbitrage, no need for a fancy name.
More recently, with the passage to PoS, Flashbots replaced the term “Miner” by “Maximal”, then rebranding MEV as “Maximal Extractable Value” and defines it as “a measure of the total value that can be extracted permissionlessly (i.e. without any special rights) from transaction ordering.” (source)
The focus stays on transaction ordering, which is the central piece here.
Note that MEV can takes several forms: Arbitrage, Liquidations, NFT sniping etc. Explaining the different strategies is outside of this article’s scope.
Is there MEV on L2s?
MEV requires the ability to impact transaction ordering, on PoS chains this is done by paying a bribe to the validator in the form of a fee. While there is a mempool on Polygon where MEV is similar to MEV on Ethereum (pre- block builders a la Flashbots but that’s another story), not all L2s are the same.
On L2s like Arbitrum and Optimism, there is a centralised sequencer that determines the transactions ordering and no mempool. Users have no control over the ordering of transactions. They cannot frontrun, only backrun. Therefore, the question arises: when searchers send arbitrage transactions, is it still MEV, or is it just arbitrage?
In such scenarios, searchers can only favor their transaction being executed by:
- spamming transactions so that they arrive the sooner to the sequencer and backrun the target transaction
- reducing latency to the sequencer
which is really just classical arbitrage. While you try to impact the transaction order, as in: you need to be the first transaction to exploit the arbitrage, you do not “re-order” the transactions. Therefore the question arises: can it still be called MEV?
Summary
In conclusion, while the definition of MEV may seem complex at first, it is essentially a measure of the value extracted from strategies that involve influencing transaction (re-)ordering. And because on some chains one cannot re-order transactions, this raises the question of whether these can really be described as MEV.
As always, happy to answer questions in comments. If you found this article helpful, please consider giving it a clap and leaving a comment to let me know your thoughts. Your feedback is always appreciated and helps me to improve my content.
