Flashing A Light On The Dark Forest - Part 1

The concept of Maximal Extractable Value (MEV) has been thrust into the spotlight over the past few years, particularly as DeFi has emerged, becoming an integral component of a network’s economic incentives. A simple definition is that MEV is the maximal value that can be extracted from deciding the transaction order in a block. The game theory around MEV, however, is far from being so simple.

Importantly, MEV has negative externalities at both the network and user level. Regarding the former, it can lead to gas bidding wars and reverted transactions as bots increase the amount of gas they’re willing to pay in an attempt to front run the transactions of unknowing users. Regarding the latter, it’s these users who pay the price when those bots succeed, both in the form of higher gas fees and having their trade front run. If you don’t think MEV has ever disadvantaged you, take a look at http://sandwiched.wtf to see for yourself. 

Given the scope of the MEV problem, there are several solutions being worked on that seek to mitigate it via different means. The focus of these solutions ranges from innovating at the base-layer’s consensus design, creating new middleware infrastructure, and even retooling at the application-level. Which solutions gain traction and how they evolve over time will impact every user, developer, miner and validator of these networks.

In this two-part report series on MEV, we’ll primarily focus on Flashbots, the leading MEV mitigation tool that most people underappreciate, and CowSwap, a promising newcomer on the DEX aggregation scene with potential MEV benefits. We’ll start by dissecting how MEV works before moving on to a Flashbots deep dive. Once that foundation is established, we’ll continue building on it with CowSwap in Part 2. Join us as we adventure into the dark forest of MEV….

Understanding MEV

Before we discuss the intricacies of MEV, let’s review some blockchain basics to better contextualize it and perhaps even clear up some misunderstandings:

1. When a user signs a transaction, it is broadcast and ends up in a public mempool run by a node, alongside a list of other unconfirmed transactions.
2. While those transactions sit pending, Miners race to solve the complex hashing