Miner Extractable Value (MEV): Effects on Public Blockchain Networks
August 6, 2021 - Expert Commentary
Cryptocurrency is a trillion-dollar economy.
It is impressive and sophisticated. Few had the foresight to believe that it could grow this big in just twelve years. The growing adoption brings more scrutiny to any systemic issues that still linger in the vital systems.
One such issue is the concept of Miner Extractable Value (MEV).
MEV sounds like a fascinating concept. It truly is, but for all the wrong reasons.
It is a dynamic where blockchain miners can extract profits at the expense of users by messing with transactions within a block of transactions.
Miners play an indispensable role in decentralized virtual currencies, but MEV gives them dangerous power. There is always a pool of transactions awaiting confirmation (mempool). Specifically, miners can determine the order of transaction confirmation and broadcast on the blockchain and sometimes use that to their advantage especially when there is money to be made—which is quite unethical.
In reality, MEV is a measure of the profit that miners can make through their ability to arbitrarily include, exclude, or re-order transactions that go into mined blocks.
Immutable blockchain networks aim to ensure that transactions go through without double-spending and stopping confirmations. MEV is an affront to these because miners have manipulative power.
MEV doesn’t work on Turing incomplete blockchain networks
Let’s circle back to where the term Turing complete came from.
There was an English computer scientist called Alan Turing. He invented the Turing Machine in 1936, right before the start of World War 2. Turing’s accomplishments were not widely celebrated at the time because of his sexuality. His posthumous fame for coding and breaking the German code during the war has immortalized his legacy today.
In modern computer discourse, the Turing machine is a theoretical, abstract idea that can simulate any algorithm that can be logically constructed. For crypto platforms, Turing completeness means that your system can run any algorithm, including complex databases, using a simple set of information.
“Cryptocurrency” comes from the words cryptography and currency. The former means something encrypted or encoded to be secret. Therefore, a cryptocurrency is the use of hidden information written over the coin in its programming language.
Now, how do these two concepts correlate?
A Turing complete cryptocurrency uses programming language that other systems can read pretty handily.
It all boils down to the programming language and what developers intended when coding the cryptocurrency language.
Bitcoin is the original cryptocurrency. Its founder had a specific objective when launching the coin. Its programming algorithm aims to increase complexity to reduce the risk of manipulation. Developers can predict fairly accurately how a blockchain will react over a certain number of situations.
Therefore, the Bitcoin blockchain is Turing incomplete because its purpose is to prevent the likelihood of easy prediction of its reaction to a specific input.
Bitcoin Is Turing Incomplete
Bitcoin has limited Turing completeness.
Some argue that it has a certain level of Turing completeness. However, the fact that the Bitcoin blockchain specifically aims to make mining more difficult and reduces the likelihood of miners gaining the ability to manipulate transactions goes against Turing completeness.
This quality has been a disadvantage is getting multichain functionality and creating Loops. In programming, a loop is a sequence of instructions that is continually repeated until a certain condition is reached. The Bitcoin blockchain makes execution of loops difficult. That said, its nature bodes well for security and integrity of transactions on the blockchain.
Earlier coins like Bitcoin and Litecoin are Turing incomplete. Their focus was the security of transactions rather than functionality and scalability as is the case for later blockchains. Accordingly, Bitcoin does not have the MEV problem that Turing complete blockchains have.
MEV And Effects on The Turing Complete
Vitalik Buterin rose to the limelight in 2014 after launching Ethereum as a Turing complete cryptocurrency.
At the time, Bitcoin had laid out one model of cryptographic transactions. Ethereum introduced the idea of smart contracts. Smart contracts aim to enhance blockchain commerce and communication, even with external systems.
Ethereum can execute smart contracts because it is Turing complete. This quality gives this blockchain the ability to understand and implement future agreements. The codebase gives it the ability to perform just about any task, as long as it gets the proper instructions, enough time, and processing power.
Unfortunately, the higher functionality comes at a price. The Ethereum blockchain is written by consensus, but only one miner chooses the content that goes into one block. Miners can engage in front-running, back-running, sandwiching, and generally exploiting transactions that go into the blocks.
An anonymous developer discovered the MEV issue in Ethereum pre-genesis in 2014. He predicted that this would become a problem in the future. For now, some downplay the situation as a little slippage that does not affect the Ethereum blockchain in profound ways.
Estimates place MEV losses at about $1.4 billion annually from the total decentralized finance (DeFi) market of around $50 billion. This figure cannot be dismissed much longer. It represents value that miners unfairly take from users and is a significant problem for Ethereum moving forward.
Common Forms of MEV Attacks
One of the most prevalent forms of MEV was front running by bots merely replicating user transactions. These bots have higher gas prices so that mines pick the more expensive transactions.
Cryptocurrency miners use this to ensure that they either get the transactions they want ahead or inflate the market to earn more fees for themselves. A more random form of transaction confirmation reduces this discretion and makes miners have less power.
Another common form of MEV is back running. Here, a miner exploits users by taking advantage of how the users’ transactions will change the market conditions and place their specific transactions right after the users. Some miners deploy a sandwich attack, which combines the two to gain an unfair advantage from both ends.
MEV places miners in a position of disproportionate power. They are the only ones with the ability to organize transactions within a block. This form of value extraction can occur in the Ethereum blockchain because of the design of its mempool.
In all this, let’s not forget that cryptocurrency miners are human.
If there is one thing that this species has shown over millennia, when one has an opening to gain an economic advantage over the others, they will likely use it. The possibility of MEV profitability undercuts the essence of decentralization.
It is like having one of those renaissance revolutions during which peasants rise up against feudal lords only for them to get new feudal lords who still exploit them in the new system. The opening for MEV attacks in Turing complete blockchains is a severe problem.
Bitcoin is a functionally limited coin. It does not have smart contracts and experiences scalability issues. However, its secure blockchain is head and shoulders ahead of Turing blockchains in decentralization.
This Problem Cannot Remain Unaddressed
Miners are not supposed to play such an overbearing role in blockchain affairs.
These forms of MEV will continue as long as miners have an opening to do it.
DApp designers can use more MEV-resistant design patterns in their smart contracts. This contingency calls for better encryption to hide transactions from attackers.
Decentralization is like a baby that needs nurturing. It is a commitment for posterity, and all blockchain enthusiasts need to roll up their sleeves and tackle this problem.
There is a ray of hope though. With Ethereum shifting to a staking system without miners, the MEV problem seems addressed. At present though, the rise of flashbots designed partly to prevent front-running offer relief while also help tame Gas fluctuation–benefiting the ecosystem wholesomely.
The benefits of decentralization should be robust systems that are equitable by default.
However, if the system is more vulnerable than traditional systems, what is the point?