MEV Mystery: Security Implications Of Greed

What is MEV?

Maximal Extractable Value (MEV) has become a significant topic of discussion within the blockchain ecosystem. The term refers to the additional value that can be extracted from transactions executed on a blockchain, above and beyond the standard transaction fees. This article will delve into the concept of MEV, focusing specifically on MEV bots and their role in recent events like the "memecoin" craze, sandwich attacks and finally their security implications.

Origins of MEV

The notion of MEV was first introduced by Phil Daian et al. in 2019 through a research paper titled "Flash Boys 2.0: Frontrunning, Transaction Reordering, and Consensus Instability in Decentralized Exchange."

In essence, MEV describes various ways for miners or validators to strategically include, exclude, or reorder transactions to maximize profits.

Since then, multiple strategies have emerged, including liquidation bots, which actively monitor decentralized finance (DeFi) platforms for lucrative opportunities.

Key Players

One of the notorious creators of MEV bots, known as Jaredfromsubway, is reputed to have generated up to one million USD daily—yes, daily. However, this accomplishment was likely more prevalent during the initial phases of the MEV revolution. As competition intensifies and bots become increasingly adept at swiftly identifying opportunities, profits for all parties involved are diminishing.

"jaredfromsubway.eth" is making $1M with his MEV bot daily! MEV bots are a power that not everyone is able to possess.Let's explore! 🧵👇

— defizard (@belizardd) September 20, 2023

Sandwich Attacks and Meme Coins

Recently, MEV gained considerable attention when malicious actors exploited Uniswap V3 using sophisticated front-running techniques known as "sandwich attacks," primarily targeting popular meme coins like DogWifHat(WIF).

Sandwich attacks involve placing transactions before and after a victim's trade, manipulating token prices between those trades to profit at the expense of the targeted trader. To achieve this, threat actors employ advanced algorithms similar to liquidation bots but designed explicitly for frontrunning purposes.

In the case of meme coins, the high trading volumes and rapid price swings create attractive conditions for sandwich attacks.

• By detecting large buy orders placed by retail investors, bad actors place corresponding sell orders ahead of them, driving up asset values temporarily.
• Once the investor completes the order, the malicious actor places another sell order behind it, capitalizing on the inflated token price.
• Consequently, both traders lose out—the initial buyer pays more than necessary, while the second seller receives less than anticipated.
• Meanwhile, the perpetrator benefits handsomely from the price discrepancies created throughout the process.

It should be noted that not all instances involving MEV bots lead to negative outcomes; some participants genuinely benefit from them. Nevertheless, understanding these mechanisms becomes essential amidst growing concerns about transparency, ethics, and systemic risks associated with certain practices.

Regulatory scrutiny regarding MEV and other forms of front-running remains minimal, leaving developers and community members responsible for addressing these challenges collectively.