MEV (Miner Extractable Value) Protection: Techniques and Emerging Solutions

Introduction

MEV, or Miner Extractable Value, has become a hot topic in Web3, particularly for developers and auditors working on DeFi protocols impacting blockchain networks’ fairness, efficiency, and security. MEV refers to the profit miners (or validators) can extract from the ability to reorder, include, or exclude transactions within a block. While MEV initially seemed like an inevitable byproduct of blockchain operations, it has grown into a multi-million dollar phenomenon that poses risks to the integrity of decentralized systems.

As the ecosystem evolves, so do the techniques for extracting value from it and the methods for protecting against such extraction. This article explores the current landscape of MEV protection, diving into established techniques and emerging solutions.

In this article, we’ll explore MEV, why it’s problematic, and various strategies Web3 developers and auditors can use to mitigate its effects. We’ll focus on emerging solutions aimed at reducing MEV’s harmful impact.

What is MEV?

At its core, MEV refers to the additional value miners or validators can capture by altering the sequence of transactions in a block. MEV isn’t limited to miners — any party manipulating the order of transactions (like validators in Proof of Stake systems) can benefit from it. MEV is particularly relevant in DeFi due to arbitrage, liquidation, and front-running opportunities created by decentralized exchanges (DEXs), lending platforms, and other financial protocols.

Examples of MEV:

• Arbitrage:

Consider there’s a price difference for the same token on two decentralized exchanges. A miner could reorder transactions to ensure they benefit from this price difference before anyone else does.

• Front-running:

When a user submits a large transaction to buy or sell tokens, miners can spot this opportunity and place their transactions before it, profiting from the subsequent price changes.

• Liquidations:

In DeFi lending protocols, positions can be liquidated if collateral falls below a certain threshold. Miners can prioritize their transactions to profit from these liquidations.

• Sandwich attacks:

A miner can use a combination of frontrunning and back-running to profit from both sides of a trade.

The extraction of MEV can distort the intended behavior of decentralized protocols, reduce user trust, and increase transaction costs, making the DeFi ecosystem less predictable and more vulnerable to attacks.

Why is MEV Problematic?

MEV has several detrimental effects on the Ethereum network and other smart contract platforms:

Increased Gas Fees:

As bots compete to be the first to execute profitable transactions, they engage in “gas auctions,” bidding higher gas prices to gain priority. This results in inflated gas costs for all users.

DeFi Exploitation:

MEV extraction distorts DeFi protocols by enabling front-running and sandwich attacks, leading to suboptimal user outcomes. For instance, a front-runner could buy before a large trade and sell right after it, profiting at the trader’s expense.

Network Instability:

As MEV becomes more lucrative, miners or validators may prioritize short-term profits over the network’s health. This can incentivize selfish mining or validator behavior, potentially leading to chain reorganizations or network congestion.

Centralization Risk:

MEV opportunities may incentivize centralization, as miners or validators with greater computational resources or access to order flow have an advantage in extracting value.

Techniques for MEV Protection

Given the risks associated with MEV, the community has developed several techniques to mitigate its impact. These solutions focus on reducing opportunities for transaction reordering and improving the transparency and fairness of transaction execution.

1. Commit-Reveal Schemes

In commit-reveal schemes, users submit a commitment to a transaction without revealing the full details until later. This can prevent front-running because the exact contents of the transaction are hidden until it is confirmed. It works as follows:

a) Users commit to a transaction by submitting a hash of their intended action.

b) After a set period, users reveal their actual transaction.

This method prevents frontrunning by obscuring the transaction details until the reveal phase. However, it introduces latency and can be cumbersome for users.

• Ethereum’s EIP-1559:

While this upgrade primarily targets transaction fee structure, introducing base fees and a tipping mechanism reduces miners’ advantage in transaction ordering, indirectly lowering MEV. This update was included in Ethereum’s London hard fork, which occurred on 5 August 20221 at block 12965000.

Implementation example:

2. Timelock Mechanisms

Timelocks introduce a delay between transaction submission and execution, potentially allowing users to react to malicious activities:

3. Slippage Protection

Implementing strict slippage controls can mitigate the impact of sandwich attacks:

4. Transaction Ordering via Fair Sequencing

Fair sequencing eliminates miners’ ability to reorder transactions arbitrarily by enforcing a more neutral and transparent ordering system. In some implementations, this can be achieved through cryptographic commitments, where transaction order is determined based on the time of submission rather than miner discretion.

For example:

• Chainlink’s Fair Sequencing Service (FSS):

FSS is designed to provide unbiased transaction ordering. Removing the ability to prioritize transactions based on gas fees or personal interest reduces the scope for MEV extraction.

• Flashbots Auction:

Flashbots are designed to enable private, transparent auctions for MEV opportunities. They help reduce harmful front-running by keeping MEV-related transactions out of the public mempool, thereby reducing the chances of front-running or sandwich attacks. Users can still capture MEV but in a more controlled and less disruptive manner.

Solutions to Tackle the MEV Bottleneck

1. Flashbots and MEV-Geth

Flashbots has introduced a more ethical MEV extraction method by allowing miners to run a modified Ethereum client (MEV-Geth). This creates a separate channel for bundle submission, reducing network congestion and making MEV extraction more predictable.

Developers can interact with Flashbots using the @flashbots/ethers-provider-bundle package:

2. Order Flow Auctions

• Balancer V2:

Balancer’s latest version includes an internal mechanism to reduce the impact of MEV by executing large trades in smaller, batched transactions. This reduces the chance of front-running or sandwiching by obscuring individual transaction details.

• CowSwap:

CowSwap uses batch auctions to execute trades, which minimizes MEV by pooling multiple transactions and executing them simultaneously. By doing so, it reduces opportunities for front-runners to exploit individual trades.

3. Privacy-Preserving Transactions

Emerging solutions are exploring using zero-knowledge proofs to conceal transaction details until execution. While still in the early stages, this approach promises to provide strong MEV protection without the latency issues of commit-reveal schemes.

• Tornado Cash:

While primarily a privacy tool, Tornado Cash can obscure the origins of transactions, reducing the risk of front-running or other forms of MEV extraction.

• Aztec Protocol:

Aztec Protocol leverages zk-SNARKs to provide privacy on Ethereum, potentially preventing MEV by keeping transaction details private until settlement.

4. On-chain Order Books

Protocols like Serum on Solana implement on-chain order books, which can provide better transparency and fairness in trade execution, potentially mitigating some forms of MEV.

5. PBS (Proposer-Builder Separation)

One of the more recent proposals for mitigating MEV is Proposer-Builder Separation (PBS). PBS splits the responsibilities between block proposers and block builders, where builders are responsible for optimizing block contents, and proposers choose the most profitable blocks to include in the chain. By separating these roles, MEV extraction becomes more controlled and less centralized. More about it here.

Implementing MEV Protection in Your Projects

When designing DeFi protocols or smart contracts, consider the following:

1. Use commit-reveal or time-lock mechanisms for sensitive operations.
2. Implement strict slippage controls.
3. Consider integrating with MEV protection services like Flashbots.
4. Keep an eye on zero-knowledge solutions as they mature.

Conclusion

MEV protection is an evolving field, with new techniques and solutions emerging regularly. As Web3 developers and auditors, staying informed about these developments and implementing appropriate protection mechanisms in your projects is crucial. While perfect MEV protection remains elusive, combining the techniques discussed can significantly reduce the impact of MEV on your users.

Remember, the goal isn’t just to protect against known MEV strategies but to design systems inherently more resistant to value extraction. As the ecosystem evolves, so will our approaches to creating fairer, more efficient decentralized systems.

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