Ethereum's Transaction Evolution and MEV
In the early days of Ethereum, transactions were straightforward. If you wanted to send ETH (Ethereum's currency), you'd use a wallet. This transaction would broadcast across the Ethereum network, landing in the mempool – like a waiting room for transactions. Miners would then pick these transactions, prioritizing those with higher 'gas fees'. Think of gas fees as tips you give to get quicker service.
But as Ethereum's decentralized finance (DeFi) grew, so did the competition for transaction space in blocks, leading to strategies like arbitrage between decentralized exchanges (DEXs). Arbitrage is buying something cheap in one place and selling it for more elsewhere. In 2019, studies like "Flash Boys 2.0" uncovered bots competing in Ethereum's mempool (transaction waiting area) to take advantage of these opportunities. These bots would bid against each other, paying higher gas fees to ensure their transactions were executed first, allowing them to profit.
Rise of MEV: Miner Extractable Value
The term Miner Extractable Value (MEV) refers to the extra profit miners can make by including, excluding, or reordering transactions. Beyond arbitrage, strategies like frontrunning, backrunning, and sandwich attacks (methods of manipulating transaction order for profit) became lucrative for both bots and miners. However, this led to network congestion as more bots competed, increasing transaction costs and degrading user experience.
To address this, the Flashbots team developed tools like MEV-Geth and MEV-Relay to handle MEV activities off-chain, reducing pressure on the main Ethereum network.
MEV in the Age of Proof-of-Stake
With Ethereum's shift to Proof-of-Stake (PoS), MEV evolved from 'miner' to 'maximum' extractable value. The Flashbots introduced MEV-Boost to separate block building and proposing, allowing validators to sell block space to third parties called builders. This structure prevents stake centralization by enabling solo stakers to access the same infrastructure as large pools.
Since Ethereum's Merge, over 500k ETH (over 1.8b USD) has been extracted through MEV strategies. This mechanism works by encouraging validators to propose blocks built by others, maximizing collected fees.
Future of MEV on Ethereum
Looking ahead, MEV may push towards geographic centralization due to the importance of latency and speed. In the competitive MEV market, even a 1 millisecond can offer a competitive edge, urging infrastructure colocation like being in the same data center as exchanges.
Ethereum's Layer 2 (L2) solutions will also reshape MEV. As L2s aim to take over more transactions by reducing fees, MEV dynamics will shift. For instance, L2s like BASE target high throughput, handling up to 1 gigagas per second, far beyond Ethereum's current capacity. This can lead to strategies where searchers flood the network with transactions to capture MEV opportunities.
As Ethereum progresses, MEV's role will remain significant, and the infrastructure supporting it will continue to evolve, especially as Ethereum advances its L2-focused roadmap, ensuring scalability while managing MEV challenges.
