Key Takeaways

Definition of MEV: Maximal Extractable Value (MEV) refers to the maximum profit a block producer can generate by manipulating transaction orders.
Types of MEV: Toxic MEV practices, like front-running and sandwich attacks, are harmful and undermine user trust and network integrity.
Consequences of Toxic MEV: MEV leads to centralization, unfair practices, and a lack of confidence among users.
Economic Impact: Yearly losses due to MEV extraction reach billions of dollars, primarily affecting decentralized finance users.
Solutions and Innovation: Alternatives exist that can reduce or eliminate toxic MEV without sacrificing performance.
Call to Action: Everyone in the blockchain ecosystem must recognize the importance of addressing MEV to preserve the principles of fairness and decentralization.

MEV is a choice blockchains must confront

Maximal Extractable Value (MEV) is a significant challenge for blockchains, one that can undermine the foundational principles of decentralization and fairness. It is a choice, not a necessity, and tackling it is both an ethical and strategic imperative for the future of Web3. The article emphasizes the harmful aspects of toxic MEV and calls for collective action from developers, users, and investors to create a fairer blockchain ecosystem.

Understanding MEV and Its Implications

Decentralization, transparency, and permissionlessness are the core principles that initially drew many into the blockchain world, yet these ideals are increasingly threatened by an often-overlooked issue: maximal extractable value (MEV).

MEV is not a predetermined aspect of blockchain technology; rather, it’s a choice. Many mistakenly perceive it as an inevitable consequence of using blockchains. In reality, MEV arises from constructed incentives, and there are ways to eliminate it. If left unaddressed, it transforms into a hidden cost that acts as a form of censorship and undermines the values of fairness and decentralization that we aspire to uphold.

Allowing MEV to persist erodes user trust and hinders the broader adoption of blockchain technology. On the other hand, dealing with it effectively can protect users and signal that we are building a trustworthy and resilient infrastructure. For developers and investors alike, recognizing and addressing this threat is both ethically necessary and strategically vital for the future of Web3.

The Hidden Censorship Issue

Maximal extractable value represents the highest profit a block producer can gain by rearranging transaction orders. While some advocate for neutral forms of MEV, such as decentralized exchange arbitrage, much of it poses a threat. Toxic MEV acts as a form of financial censorship, jeopardizing decentralization, security, and permissionlessness.

Common harmful practices include block withholding, time-bandit attacks, front-running, and sandwich attacks. These tactics reorder transactions, allowing one to capture value at another user’s expense. Such acts are not innocent errors but intentional misleading practices that undermine users' intentions and erode trust in the system. Their existence reflects a deliberate policy choice rather than an unavoidable element of technology.

The Unseen Cost of Centralization

Toxic MEV is indicative of centralization within systems intended to be decentralized. Ideally, no single entity should control transaction order. However, MEV consolidates influence among a select group of extractors, who exploit network dynamics for their gain.

This creates a playing field that is far from equal. When users worry about being exploited through front-running or sandwich strategies, they begin to lose confidence in the integrity of the blockchain system. This trust deficit can be fatal for long-term adoption and can distort incentives—rewarding exploiters instead of builders who enhance the network. This misalignment is a significant risk to the credibility of blockchain technology.

The Scale and Obscurity of MEV

The term “invisible tax” aptly describes MEV: costs are hidden from users yet add up to billions of dollars lost each year in decentralized finance.

For instance, on Ethereum, the extraction of MEV ballooned from $78 million in early 2021 to $600 million in 2023, with $133 million siphoned off in 2022 alone. These estimates might even be conservative due to hidden tactics like multi-block MEV and untraceable long-tail attacks. This veil of opacity enhances the challenge, making it possible for users to remain unaware of the losses they incur as a result of tolerated MEV practices.

MEV Isn't Inevitable or Necessary

Some contend that MEV is a necessary evil, yet that reasoning falls short and fails to inspire action.

Proponents argue that MEV enhances liquidity, but real arbitrage and market-making can thrive in transparent systems that do not depend on privileged transaction arrangements. Efficiency and fairness can coexist, as seen in experiments with encrypted mempools and randomized ordering.

Moreover, some maintain that MEV is vital for incentivizing block producers. However, builders already receive block rewards and transaction fees. MEV represents an unearned windfall that often comes at the users' expense.

A particularly dangerous misconception is that MEV cannot be avoided. In fact, effective solutions like encrypted transactions, fair-ordering protocols, threshold cryptography, and proposer-builder separation experiments show that toxic MEV can be minimized or even eradicated without compromising performance. Choosing not to pursue these solutions signifies a passive acceptance masked as realism.

A Collective Ethical Responsibility

Beyond the technical aspects, confronting MEV is crucial for the essence of blockchain. If decentralization is to hold any weight, the issue of toxic MEV needs to be tackled directly.

Layer-1 builders should create protocols designed to resist MEV from the ground up. Developers need to steer clear of networks that revolve around exploitation. Users must grasp that fairness and ethics form the backbone of decentralized networks, while investors should support chains striving to tackle MEV—this approach is both principled and strategically sound.

Creating a fair blockchain ecosystem is not just feasible; it is vital. Such ecosystems will ultimately reward those who contribute positively and will ensure that technology fulfills its promise of trust and decentralization.

In the end, what defines us is not MEV but the choices we make.

Opinion by: Da Hongfei, founder of Neo.