The Ethereum network is offering its lowest Maximum Extractable Value (MEV) in six months after a major mining pool eliminated lucrative front-running of decentralized exchanges.
MEV profits sent to Ethereum miners recently dropped to just $172,000 per day, noted Delphi Digital in its newsletter, a considerable decline from levels that often exceeded $1 million last year.
Ethermine, the largest Ethereum pool currently mining more than 30% of all blocks, has been operating since 2016. It’s run by the same administrator as Ethpool, another large mining group.
Mining pools are collectives of miners. Pool operators organize, allocate, and administer the considerable workloads in high-performance crypto mining.
Ethermine enabled front-running software last March in a bid to appease miners disgruntled by Ethereum’s transition to EIP-1559. The upgrade took transaction fees away from miners, which are now burned instead.
MEV, which is sometimes called Miner Extracted Value, involves exploiting information gleaned from transactions of ordinary users before they’re processed.
MEV is often referred to as Ethereum’s “invisible tax,” so less MEV could be considered indication of more fairness in the network.
Still, it has remained an unsolved error in the code of Ethereum and other Turing-complete blockchains.
In a fair blockchain, miners select transactions according to their fees. Users pay miners to include their transactions while miners select the most profitable and valid ones, adding them to blocks first.
Ethereum miners, however, might choose lower-fee transactions with an ulterior motive. MEV is an adversarial attack whereby miners forcibly exclude or reorder transactions within a block for their own gain.
These edits allow miners to execute trades, loans, or other valuable actions before ordinary users.
This presents them instant advantage: miners arbitrage by buying slightly lower and selling marginally higher, or otherwise earn extra rewards.
Overall, Ethereum miners have generated themselves nearly $588 million via MEV plays, and more than $24 million in the past 30 days, according to Flashbots.
Reports surfaced last October indicating Ethermine had restricted front-running of decentralized exchanges (DEX), meaning miners could no longer leverage unprocessed DEX trades for their own profit.
And while MEV-related profits seemed healthy throughout November and December, they’ve since dwindled.
New tools helped reduce Ethereum’s MEV problem
Satoshi Nakamoto purposefully designed Bitcoin to be non-Turing complete to protect its users from unnecessarily complex financial software.
In contrast, Turing-complete blockchains like Ethereum do allow full software loops and read/writes to arbitrary memory locations.
It’s the extensive programmability of Turing-completeness that permits complex decentralized finance (DeFi) applications.
This expansiveness creates collateral damage like MEV — which across all related blockchains is a multi-billion dollar annual industry based on ripping off retail investors and regular crypto users.
As previously mentioned, Ethereum miners maximize profits by selecting transactions with the highest fees and MEV tactics like trading bots.
- Ethereum miners also engage in spontaneous fee (gas) wars to prioritize valuable transactions within blocks.
- They execute arbitrage trades ahead of other bots with millisecond latency in colocated server farms, dwarfing the capabilities of any human trader.
- Miners program bots to instantly detect and front-run adversarial trades made by humans, outbidding gas and reordering transactions with sub-second precision.
Even when bots don’t “win” a gas bidding war, they can clog up block space when their transactions return to the originating wallet. This creates artificial scarcity so they can attempt to run-back unfavorable outcomes.
Tools to combat front-running include Flashbots, which allows miners and pool operators to add other characteristics to transactions besides just a fee.
Flashbots’ auction functionality “maximizes miner payoffs while providing an efficient venue for price discovery on the value of a given MEV opportunity,” according to its documentation.
Nowadays, 93% of Ethereum’s mining hashrate uses Flashbots, noted Delphi Digital, and 54% of generated blocks have Flashbot-related transaction bundles.
The CowSwap DEX aggregator also has mechanisms for combatting MEV.
CowSwap gets its name from “Coincidence of Wants” (CoW) tools that enable peer-to-peer trades with fewer swap fees, transaction batching that optimizes gas fees, and the prevention of “sandwich” attacks conducted by bots seeking profits from front-running and back-running.
CowSwap recently saw its highest monthly volume with $2 billion in swaps in January. These tools — combined with Ethermine’s ban on DEX front-running and other market conditions — helped reduce Ethereum’s MEV to its six-month low.
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