• MEV, or Miner Extractable Value, or a new way for miners to extract revenue from the Ethereum blockchain in an era of reduced mining revenue
  • MEV is a measure of the income a miner receives from their ability to reorder transactions within a block. This can be problematic as it allows front-running of transactions, and challenges the idea of the immutability of the blockchain

The London hard fork went live Thursday, and despite some vocal opposition from miners, the EIP-1559 upgrade went through without a hitch and the price of Ether subsequently rose nearly 4% to $2,800 according to CoinGecko

“The London Hardfork is one of the most significant upgrades to Ethereum in the history of the network. In our eyes, the upgrade will be viewed as a positive catalyst. It makes the network more usable by making fees more predictable for end users and also creates a new potentially deflationary monetary policy. The biggest outstanding question is around EIP-1559, which radically reduces revenue earned by block producers and therefore potentially reduces the security of Ethereum,” Tushar Jain, Managing Partner, Multicoin Capital told Blockworks in a statement.  “We expect block producers to make up lost revenue by either capturing more MEV or by joining other networks that help them earn fees in different ways.”

Of miners and MEV: Ethereum’s new reality

MEV, or Miner Extractable Value, refers to the ability for miners to re-prioritize the orders of transactions on the Ethereum blockchain. This process was first described in a paper published in mid-2020 by Cornell Researchers called the “Flash Boys 2.0” which documented the rise of bots on the then-nascent decentralized exchange market that would front-run trades by outbidding them on the network, forcing their trades to come in first and materially moving the market in their favor.

The value lost to retail investors from this trade re-ordering hasn’t been quantified, but to an average observer it would remind them of some of the criticisms put forward by retail traders at the height of Robinhood’s GameStop fiasco earlier this year. 

According to Flashbots, an aggregator that tracks these bots and the MEV they extract, since the start of 2020 $725.7 million in value has been extracted by miners in this fashion.  For a point of comparison, the total value locked into DeFi is just above $73 billion according to DeFi Pulse and the trading value on UniSwap, the best known DEX, is around $1.7 billion a day according to CoinGecko

This all comes back to one core issue: miners have to make up for lost revenue because of EIP-1559’s ‘burning’ of transaction fees as a form of rent control on fees and deflation on the Ether money supply. According to ultrasound.money, since the London Hard Fork went live earlier today over 2,400 ether or $6.7 million has been burnt.

Ethermine, a vocal opponent of EIP-1559, introduced in March specific front-running software for its mining pool (it accounts for just over 20% of the collective hashrate of Ethereum). At the time, Ethermine said this was to “compensate for the upcoming mining reward reduction caused by the adoption of EIP 1559.

While the threat of a miner coup was played down because of the looming transition to ETH 2 and the move away from miner-intensive proof of work to proof of stake, the problem is all signs point to MEV being something that’s here to stay. Miners will simply be swapped out and replaced with validators — stakeholders that hold a lot of Ether — doing the same. 

According to a report from Flashbots, miner rewards will simply be called validator rewards. The name might shift to ‘maximal’ not ‘miner’ extractable value, but the principle will remain. 

“We find that MEV will significantly boost validator rewards but may reinforce inequalities among participants of ETH2,” the group wrote. 

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  • Blockworks
    Reporter
    Sam Reynolds is a Taipei-based reporter, covering digital assets and regulation throughout Asia. Before joining Blockworks he was an editor at Forkast News and an analyst with IDC.