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UC Berkeley boffins have discovered that strategies aimed at extracting additional profits from Ethereum transactions are to the detriment of other cryptocurrency investors and threaten the security and stability of the entire Ethereum ecosystem.

In a document titled “Extracting Godl [sic] from the Salt Mines: Ethereum Miners Extracting Value”, doctoral students Julien Piet and Jaiden Fairoze, together with computer science professor Nicholas Weaver, launch a triple of hints – gold, Hodland Godel – to argue that MEV, or “Miner/Maximal Extractable Value”, undermines the integrity of the Ethereum network.

The Ethereum network is based on a blockchain made up of cryptographically linked blocks of data. Those mining on the network perform proof-of-work calculations with a computer to aggregate a set of transactions into a block and add it to the chain. This incurs transaction fees related to the computational effort known as “gas.”

MEVas defined in the Ethereum documentation, “refers to the maximum value that can be extracted from block production beyond the standard block reward and gas fee by including, excluding, and changing the order of transactions in a block”.

It exists because Ethereum miners control the inclusion, exclusion, and order of transactions. Although miners are compensated for their contributions to the blockchain, they can order transactions specifically to increase their reward. As the university trio puts it, with the MEV, “miners get the lion’s share of the profits, rather than independent users of private relays.”

At its heart, the SRM is a form of arbitration – taking advantage of a price difference or market inefficiency – but it exists in flavors that would be illegal in regulated financial markets. For example, MEV can be extracted via avant-garde – capitalize on knowledge of a pending transaction before it is committed to a block.

Piet, Fairoze, and Weaver note that there have been concerns about frontrunning in the Ethereum community since 2014 and issues with MEV have been highlighted in an article 2020 titled “Flash Boys 2.0: Frontrunning in Decentralized Exchanges, Miner Extractable Value, and Consensus Instability.”

The threat posed by the MEV has been recognized by those overseeing the Ethereum ecosystem, who noted: “As DeFi grows and gains in popularity, MEV could soon significantly exceed the Ethereum block’s base reward. With this comes a growing possibility of selfish blocking and consensus instability. Some view this as an existential threat to Ethereum and discouraging selfish mining is an active area of ​​research in Ethereum protocol theory.”

In their MEV paper – submitted for consideration at the 2022 Economics of Information Security Workshop – academics from the University of California, Berkeley describe how they developed an algorithm to analyze MEV exploitation in previously mined blocks and discovered that Ethereum miners were collecting most of the rewards, at the expense of other participants.

They found that most MEV extractions rely on private operations, 73% of which conceal commercial activity or redistribute miner rewards. They also found that 87.6% of MEV collection is through privately submitted transactions. Private transactions on the Ethereum blockchain are rare – only 2.07% of all transactions observed in blocks were private.

Nevertheless, the researchers consider the impact of the MEV to be significant for the viability of Ethereum. Of more than $6 million in MEV profits over a 12-day period, two-thirds, according to the researchers, went directly to miners. And MEV, they said, accounted for 9.2% of miners’ profits from transaction fees, or 22.7% when limited to revenue from DeFi transactions.

“In total, MEV mining in our data yielded 2,159 ETH (approximately $6,400,000), just over 12 days,” the paper said. “For comparison, this represents 2.2% of the total ETH supply created over the same period, and extrapolates to nearly $200,000,000 in profits per year.”

Some of it is simply arbitrage, where you simply explore inefficiencies between different exchange platforms to make money, but most of it is arbitrage at the expense of other users.

The MEV, they say, threatens the stability of the Ethereum network because it “creates network congestion, increases transaction prices, increases the cost of participating in DEXs [decentralized exchanges]and most importantly, threatens the blockchain consensus.”

“The MEV is basically any strategy you can implement by reordering transactions in a blockchain in order to profit from them,” said Julien Piet, a UC Berkeley doctoral student and lead author of the paper, during a telephone interview with The register. “Some of it is just arbitrage, where you’re just basically exploring the inefficiencies between different exchanges to make money, but most of it is arbitrage at the expense of other users. .”

“So let’s say a user wants to buy a lot of tokens,” Piet explained. “This person submits this transaction to buy this token. What happens is that, like in traditional finance, the price of the token will increase because there is high demand and less supply.

“The main strategy for MEV is for someone who has more control to buy a token before the transaction and sell it right after and essentially benefit from the price increase at the expense of the individual actually buying the token. in the middle which is going to have a worse exchange rate.”

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That buyer, Piet said, would lose a few percent on the trade.

Essentially, miners, through their ability to command transactions, have financial superpowers that other participants in the system lack.

Piet said there was a system in place called Flashbots which attempts to address this issue by making SRM distribution opportunities more equitably available. “But what we found is that despite the fair SRM redistribution system, miners still make more than 50% of the profits,” he said.

Piet said there are potential defenses that might be worth investigating, such as random trade order.

“One of the interesting issues is that in Ethereum, like in many blockchains, there is no regulatory authority,” he said. “And so there’s no one to say well, we want to insure a specific order. We want to make sure that doesn’t happen. In traditional finance, this type of activity – frontrunning and sandwiching – is illegal.”

Since a significant amount of profit is made today through MEV and those making transactions do not have visibility into the costs until the transaction is recorded in a block, Piet said that he thought regulation was needed to make Ethereum compatible with traditional finance. ®



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