## MEV: The Hidden Game Behind Every Blockchain Block

When you make a transaction on Ethereum or other blockchain networks, you may not realize that there is an "invisible hand" that is deciding the order of transactions to maximize profit. This is referred to as Maximal Extractable Value (MEV).

### What is MEV Really?

Maximal Extractable Value was originally known as Miner Extractable Value when Ethereum was still using the Proof of Work system. In short, MEV is a strategy to include, exclude, or reorder transactions in new blocks to gain additional profits beyond standard rewards and gas fees.

Imagine you are a block creator in a blockchain network. You have the power to choose which transactions go through first and which ones get delayed. With this power, you can capitalize on opportunities to earn extra money. This phenomenon is most prevalent in smart contract-based networks like Ethereum, where transactions often contain complex information and provide gaps for profit-taking.

Interestingly, MEV is not only a profit for block creators. There are also other participant groups called "searchers" (opportunity hunters) who actively seek and exploit MEV opportunities by paying very high gas fees to block creators. In some cases, these hunters are willing to sacrifice up to 99.99% of their profits just to ensure their transactions are executed first.

### How Does MEV Work in Practice?

The key to understanding MEV is knowing the role of block creators. They gather transactions from users, assemble them into blocks, and add them to the blockchain. The decisions they make about the order of transactions are crucial.

Normally, transactions are selected based on gas fees—transactions with higher fees will be prioritized. This is why users are willing to pay higher gas fees when the network is busy. But here lies a golden opportunity: if a transaction contains complex data ( like smart contract instructions for trading or lending ), the block creator can make advantageous decisions by reordering transactions to take advantage of market conditions.

For example, if there is a large pending buy order, the block creator or opportunity seeker can place their own orders first to secure a better price before that large order is executed. This is a classic MEV opportunity.

Important note: the term MEV has changed from "Miner Extractable Value" to "Maximal Extractable Value" after Ethereum underwent The Merge in November 2022, which shifted from Proof of Work to Proof of Stake. Now validators, not miners, create blocks—however, the MEV phenomenon remains.

### Three Common Ways to Extract MEV

**Arbitrage**

When the price of a token is different on two DEX (decentralized exchanges), an arbitrage opportunity arises. Opportunity seekers will buy on the DEX with the lower price and sell on the DEX with the higher price to capture the profit margin. MEV occurs when hunting bots detect pending arbitrage transactions, then insert their own transactions first to capture value from the price difference.

**Front-running**

This is a frontrunning strategy. When there is a large buy order still pending in the memory pool, a hunter or block creator can place their own similar buy order first. The goal is to secure the price before the large order moves the price up. Another similar strategy is called "sandwiching"—inserting a buy order before and a sell order after a certain transaction to take advantage of price pressure from both sides.

**Liquidation**

In DeFi protocols that require collateral (, if the value of the collateral drops below a safe threshold, the position will be liquidated. Smart contracts typically provide rewards for liquidation transactions. Bot hunters will track positions close to the liquidation threshold, then insert their own liquidation transactions into the block to claim the rewards before others.

) Impact of MEV: A Double-Edged Sword

It is undeniable that MEV has its positive side. Some experts argue that MEV helps the ecosystem by ensuring market inefficiencies are corrected quickly. MEV hunters race to capture arbitrage value, meaning prices quickly become balanced across various DEX. Similarly, MEV liquidations help lending protocols remain secure by ensuring risky positions are handled promptly.

However, the dark side of MEV cannot be ignored. Front-running and sandwiching impose losses on ordinary users who are forced to pay higher prices for their trades, experience greater slippage, or lose value in a zero-sum game scenario. Furthermore, the intense competition among MEV hunters to include transactions first leads to skyrocketing gas fees and network congestion.

The most serious problem: if the value of rearranging transactions in the previous block is greater than the reward of the next block plus gas fees, then the block creator has economic incentives to reorganize the blockchain. This fundamentally threatens the consensus and integrity of the network.

### Conclusion

MEV is a rational phenomenon from an economic perspective, but it also presents dilemmas for the blockchain ecosystem. As DeFi and smart contracts become increasingly complex, MEV opportunities will continue to grow. The industry is actively seeking solutions to address the MEV issue—either through new protocols or mechanisms that make MEV more transparent and efficient. Understanding MEV is crucial for anyone who wants to truly understand how blockchain and DeFi work behind the scenes.