Are Ethereum miners manipulating transaction order for profits? The answer, unfortunately, is yes. It's a complex issue impacting the very fabric of DeFi and user experience. User transactions on Ethereum’s peer-to-peer network are at risk of being attacked. The smart contracts building decentralized finance (DeFi) have introduced a new transaction ordering vulnerability.
What is Miner Extractable Value (MEV)?
In fact, a new term has been coined for the profits that miners can make via their ability to choose which transactions to include and in which order: “miner extractable value” (MEV).1 This is “The profit that miners can take from other investors by manipulating the choice and sequencing of transactions added to the blockchain.” As per BIS’s research, though miners are compensated for their contributions to the blockchain, they can order transactions specifically to boost their reward. MEV arises when miners or validators manipulate transaction ordering to extract additional value, often at the expense of other network participants. This not only affects user experience by increasing transaction costs and latency but also introduces systemic risks to the network.
How Ethereum Miners Manipulate Transaction Order
The core issue boils down to this: Ethereum miners (or validators, in the post-merge era) have significant control over which transactions are included in a block and the order in which they appear. As the university trio put it, with clever transaction placement, miners can front-run, back-run, or sandwich user trades on decentralized exchanges, executing their own transactions to profit from the price slippage caused by the user's trade. This manipulation can lead to substantial gains for the miners and corresponding losses for unsuspecting users.
Examples of MEV Exploitation
Think of a large trade on a decentralized exchange. A miner, seeing this pending transaction, can insert their own transaction just before the user's (front-running) to buy the asset at a lower price and then immediately sell it after the user's transaction drives the price up. This extracts value directly from the user and funnels it to the miner.
Is All Transaction Ordering Malicious?
It depends, really. Some miners on the Ethereum chain, like Ethermine, use non-conventional ordering for their benefit, aka they generally don't do the by-gas sort. While not all non-conventional ordering is exploitative, the potential for abuse is always present. The lack of transparency in transaction ordering makes it difficult to distinguish between legitimate optimization and malicious MEV extraction.
The Future of MEV on Ethereum
The Ethereum community is actively researching and developing solutions to mitigate MEV. These solutions range from better transaction ordering mechanisms to mechanisms that redistribute MEV back to users. As DeFi matures, addressing MEV will be crucial for ensuring a fair and equitable ecosystem.
1 Source: Bank for International Settlements research paper on MEV.