The extractable value of mining is no longer just a theoretical concept.
Some Ether miners (ETH) appear to be redesigning blocks to take advantage of DeFi opportunities in an instance of what is called “miners’ extractable value” or MEV.
Researchers have long anticipated miners’ extractable value as a potential exploitation pattern for DeFi that exploits the influence of the miners’ unique protocol. Since the miners are free to decide which transactions to include and in which order, this opens the way for various exploitation techniques for decentralised on-chain finance.
Anonymous researcher Frank Topbottom highlighted several compelling cases of MEV in nature, in what is probably the first time the public has noticed these activities.
He pointed to several cases of suspicious transactions by large groups such as SparkPool and F2Pool. These were often initiated by a small set of addresses and appeared first in blocks despite having a lower gas tariff than others that followed. The behaviour cannot be immediately explained by “legitimate” activities such as the distribution of rewards to miners. But neither is it clear what the purpose of these transactions is.
A more obvious case of MEV can be seen with transactions by some smaller groups, with Topbottom citing 2Miners, Minerall Pool and EzilPool, which contain approximately 2% of the total hashrate.
One of the transactions in question has several features that point to the extraction of value from the miners. The first hint is that their rate is effectively zero, only two Wei. This should not be confused with Gwei or one billion Wei. The Wei is the smallest unit of currency in Ether, equivalent to one billionth of one billionth of Ether.
Two Gwei would be suspicious enough in today’s market for Ethereum fees, but it is unlikely that a transaction of two Wei fees would be confirmed. In fact, it was confirmed in only 17 seconds.
Some Bitcoin Lifestyle review miners appear to be redesigning blocks to take advantage of DeFi opportunities in an instance of what is called “miner’s extractable value” or MEV.
The second clue is that the transaction is an arbitrage trade that gave its sender around USD 70 of a USD 2,800 commitment. Such a trade would never be profitable at current gas rates, therefore existing arbitrage traders ignored the opportunity. While it is not clear who is to blame for this transaction, it is virtually impossible that this was done without the help of the miners.
Topbottom pointed out that in this case, the transaction made the market a little more efficient by balancing prices where others could not. But the power of the miners can go much further.
Because of their power to rearrange transactions at will, miners can overtake all non-miners. This can be used to beat all others in arbitrage transactions, auction settlements and token bids, among others.
This power has its benefits, Topbottom said. The miners could be the most efficient gatekeepers, which would help avoid situations like Maker’s USD 0 guarantee bids on Black Thursday. The other side is that the miners could send in their own bids for USD 0 and block legitimate auction participants completely. This is incredibly unlikely, as it would require the collusion of all the miners for long periods of time, but the theoretical possibility highlights the power the miners have.
A more realistic scenario is that miners compete for high-value MEVs, which would encourage them to provoke chain reorganisations in order to steal the “loot” of others. This would be extremely destabilizing for average users who would see their transactions eliminated from the chain after confirmation.
Preventing miners from extracting value from DeFi is very difficult, as these actions do not go against the rules of consensus. It is also worth noting that this is not exclusive to the Ethereum test miners. Those interested in Ethereum 2.0 would have the same power, as long as the overall architecture of the block chain remains the same. Operators of some layer two solutions could also target their users.
One possible solution under consideration is the MEV auction, which would formalize the behavior and “sell” the right to re-order transactions at will.