Miners are often the often forgotten heroes of the Ethereum blockchain. They process user transactions, add blocks to the chain, and help keep the entire ecosystem running as they compete to solve cryptographic puzzles. Although they are rewarded with 2 ETH (about $4,000 at current quote) plus transaction fees for any blocks they manage to mine, they can generally earn more. The problem: to do this, they need to tinker with their transactions. Welcome to the world of MEV, also known as miner extractable value or sometimes maximum extractable value. The acronym refers to how much Ethereum miners can earn — not simply processing user transactions and adding blocks to the chain, but choosing what goes into each block and in what order. Miners have a lot of power in this regard. As Charlie Noyes, a partner at cryptocurrency investment firm Paradigm, wrote on his blog in February, miners can "arbitrarily include, exclude or rearrange transactions within the blocks they produce." But why would they care about the order of transactions? To capitalize on arbitrage opportunities on trading platforms like Uniswap. This is all possible because time matters in Ethereum and in the decentralized finance (DeFi) applications that run on its protocol. The network is constantly being scoured by bots looking to buy cheap on one platform and sell high on another before prices settle. When you're looking for arbitration between different protocols, you want to make sure your transaction passes over the network as instantly as possible. But DeFi — the burgeoning Ethereum-based industry that allows people to borrow, earn income or exchange assets without middlemen — often clogs up the Ethereum blockchain, leaving people to wait for their transactions to be validated. This is a big risk for urgent exchanges. If you are a block late, someone may have already taken advantage of the arbitrage opportunity. You can get around this by purposely paying a higher transaction fee (knowing that you would profit heavily from the transaction itself to make up for the difference). Once miners — or, indeed, the software they run — have the power to decide which transaction goes on which block, they will prioritize those that pay the most and profit the highest rate. And that can be good. Arbitrage bots, which are most often run by traders rather than miners, can help balance prices across markets, resulting in what Noyes calls a “benign MEV transaction”. This becomes an issue when these bots “recognize a user's trade before it is executed and 'sandwich' their transaction between a buy and sell order itself,” Noyes wrote. That is, bots can see that trading is going to make a lot of money for someone, so they try to do that first. In the end, it's the user who gets it wrong. These arbitration bots are especially problematic when managed by the miners themselves, as they create a conflict of interest. Noyes described the strategy in worrying terms. “MEV is not just a curiosity,” he wrote. "These little financial games create waves of encouragement, a tortuous chain of cause and effect that must be followed to see contagion." One thing this could lead to, Noyes pointed out, is a breach of consensus, making it very attractive for miners to try to tinker with blocks that have already been created in search of arbitrage opportunities — although he noted in February that this has yet to was happening. As Dragonfly Research analyst Saneel Sreeni wrote this week, the case is still mostly hypothetical: “MEV's profits are becoming an increasingly larger part of the economic rewards of miners, making the threat of weather rogue attacks (offensive that) concentrates computational power in an attempt to re-mine old blocks) and most likely reorganizations. It also means that theoretically it could be possible to bribe miners to reorganize the chain.” Reorgs, or reorganizations, occur when competing chains appear in the blockchain as blocks are mined at the same time. Sometimes miners can build on top of a block before noticing that another parallel block is also there. In these cases, software customers will essentially go back and decide which of these chains is the right one. Ethereum reorgs that happen around a block deep are quite common. And, as Noyes' colleague Georgios Konstantopoulos and Ethereum creator Vitalik Buterin wrote this week in an article that analyzes a hypothetical attack on DeFi protocols via reorgs, even two-to-five-block deep reorganizations aren't that rare either. malicious.
During the last few weeks there has been a lot of discussion around the possibility of miners running custom software that accepts bribes to reorg the chain.@gakonst and I explain how this will become harder after the proof of stake merge:https://t.co/ghwikceVBr— vitalik.eth (@VitalikButerin) July 20, 2022
Despite this, the reorganizations have several negative effects on the network, say Konstantopoulos and Buterin: they create more costs for the nodes (the hardware that runs the blockchain), make the user have to wait longer for transactions to be confirmed and make network attacks more likely. All three experts agree that there is a potential problem with miners playing a game that makes them not choose the longest chain, but rather support competing chains to profit from SEM. Konstantopoulos and Buterin refer to reorganization mining as “myopically rational”. Running it would work in the short term, but it threatens trust in the network in the long run, thus devaluing ether itself. Which, it's worth remembering, doesn't mean it can't happen. They believe, however, that Ethereum's planned departure from the proof-of-work consensus, in which miners create new blocks, to the participation proof, in which validators deposit their ETH for the right to create new blocks, will resolve this problem. That's because, with almost 200 thousand validators already participating in Ethereum 2.0, the network is much more distributed. When combined with the pseudo-random selection of thousands of validators to attest to each block, there is little opportunity for selfish actors to focus their resources. “Even single-block reorgs are extremely difficult, because an attacker who controls only a few validators cannot defeat the honest majority of thousands of attesters,” wrote Buterin and Konstantopoulos.
In Ethereum's PoS implementation, miners are no longer doing any proof of work, only need a different solution: Leader lottery: The leader is still chosen at random, but by a commit-reveal scheme to generate secure randomness called RANDAO — Hasu ( @hasufl) July 21, 2022
The solution, they said, is for Ethereum to move forward with the fusion and work as quickly as possible, but safely. Hasu, the pseudonym behind a researcher who wrote about this problem, told Decrypt that while the merger with ETH 2.0 essentially makes these reorganizations much more difficult, it won't have much effect on the MEV problem. Asked whether the update will solve the MEV, Hasu said: "Only in the very limited sense that short-term reorganizations get more difficult, but we're not seeing that in Ethereum today anyway." This means that SEM will still be a problem, even if miners no longer exist. As Hasu pointed out, "In ETH 2.0 (proof of participation), block producers for the next 12 minutes are known in advance and could work together better than miners could extract a multiblock SEM." On the other hand, Hasu suggested that this probably won't be a big concern, because it's mostly a theoretical problem. But if network reorganization starts to happen, don't blame the miners. *Translated and edited by permission of Decrypt.co