What Is MEV in Ethereum? A DeFi Power Game Uncovered

MEV stands for Maximal Extractable Value – the total economic value that can be extracted from block production beyond standard protocol rewards by manipulating the order of transaction inclusion.

The history of the term reflects the evolution of Ethereum. The abbreviation originally stood for “Miner Extractable Value” during the Proof-of-Work era. At that time, miners had the exclusive right to build blocks and could manipulate transaction order to extract additional profit. After the transition to the Proof-of-Stake mechanism, the community reinterpreted the term as “Maximal Extractable Value.” Thus, the Ethereum MEV definition is not tied to any specific consensus type but is a fundamental property of decentralized architecture.

Moreover, the MEV definition itself is not exclusive to Ethereum. Various forms of MEV are present in all open blockchains. However, Ethereum has become the primary platform for its manifestation.

The reason lies in a unique combination of factors:

• one of the pioneers of decentralized open systems
• a developed smart contract ecosystem enabling complex financial interactions
• high liquidity that makes extraction profitable
• open architecture that allows anyone to participate in opportunity discovery

This combination has turned Ethereum into a comprehensive laboratory for studying MEV, and it is within Ethereum that the concept of maximal extractable value is reflected in the broadest range of strategies and solutions.

How Does Maximal Extractable Value Work

The mechanics of how MEV works in crypto rely on the properties of public blockchains, where the order of transaction execution is not predetermined and can be changed until inclusion in a block. This creates the possibility for economic reordering – the key mechanism by which MEV arises.

After being created by a user, a transaction is broadcast to the network and enters the mempool – an intermediate storage layer for unconfirmed instructions accessible to all participants. Importantly, the mempool in Ethereum is not a global structure: each node maintains its own local copy, and transaction propagation between them occurs asynchronously. This creates the first form of informational asymmetry: different participants observe the mempool at different times and with varying degrees of completeness.

The public nature of the mempool means that the contents of all transactions are available before execution. This allows technically capable participants to analyze the economic intent of other users, including swap, lending, arbitrage, and liquidation operations. Unlike traditional markets, where such information is considered confidential, in Ethereum, it is available to everyone in real time.

A key factor is the determinism of the Ethereum Virtual Machine. Any transaction, given a known blockchain state, produces a predictable result. This enables local simulation of other users’ transactions and accurate prediction of their impact on the state of on-chain contracts, for example, price shifts in automated market makers or liquidation triggers. Thus, the public mempool becomes a source of alpha for participants capable of rapidly processing and interpreting the available information.

The transaction prioritization mechanism reinforces this phenomenon. Ethereum uses a gas auction model in which users specify the maximum price for computation. However, the final inclusion order does not necessarily match the bid: the validator building the block can choose and structure transactions arbitrarily, optimizing not only fees but also the potential MEV gains from a particular execution sequence.

The decisive actor is the validator granted the right to propose the next block. For a short period, they have exclusive control over its contents and ordering. Within the protocol’s permitted rules (balance, nonce, gas limit), the validator can choose which transactions to include, in what order, and what personal actions to insert into the chain. MEV and transaction ordering come into play here as a form of economically motivated control over the sequence of events.

This architecture creates additional incentives. The base protocol reward for a block is fixed, whereas the MEV profit is variable and in some cases significantly higher. This creates MEV and miner incentives: validators seek either to extract value themselves through analysis and reordering or to integrate with specialized searchers offering pre-built bundles with shared profit distribution.

How MEV Is Extracted in Ethereum

The infrastructural foundation of modern MEV extraction in Ethereum is the Proposer-Builder Separation (PBS) model, which formalized the division of responsibilities between block creation and block publication. PBS not only changed the technological process of block formation but also structured the participant market, turning MEV extraction into a formalized supply chain with clearly delineated roles and incentives.

Searchers are independent participants who monitor the public mempool, simulate transaction execution based on the current blockchain state, and look for sequences capable of generating economic profit. Based on this analysis, they form transaction bundles – ordered groups of transactions that include both user and proprietary actions. These bundles are sent directly to builders via private channels, bypassing the public mempool. This transfer prevents front-running and strategy theft, ensuring confidentiality until final block inclusion.

Block builders receive hundreds of such bundles from different searchers and aggregate them into candidate blocks. The builder’s primary task is to optimize the block composition by total value, accounting for both direct fees and potential MEV revenue. The inclusion of one bundle often excludes others, creating a competitive environment among searchers. The builder independently determines the transaction ordering within the block, including the positioning of their own inserts, and prepares a block candidate for submission.

Relays serve as trusted intermediaries between builders and validators. They accept finalized blocks from builders and forward them to block proposers – the validators selected by the protocol to publish the next block. The relay’s primary function is to preserve the confidentiality of the block contents until it is signed, preventing block stealing or last-minute manipulations by the builder. In most cases, the proposer receives a block from only one relay, but the architecture allows for competition among relay operators.

Block proposers complete the chain. After receiving the block from the relay, they sign it and publish it to the main Ethereum chain, finalizing the transaction ordering proposed by the builder. Although a proposer can technically interact with multiple relays, in practice, they choose the block offering the highest expected revenue. As a result, MEV is ultimately realized at this stage, and the extracted value is distributed among the participants in the chain.

As a systemic principle, PBS not only increased the efficiency of the entire chain but also paved the way for the industrialization of MEV: a separate market of infrastructure solutions has emerged, along with professional builders and relay services, and new risks, primarily the network’s dependency on a limited set of infrastructure intermediaries.

Flashbots and MEV-Boost Infrastructure

The most significant practical implementation of PBS has been the Flashbots infrastructure. It provides an open-source framework for MEV extraction based on the interaction between builders and proposers through the MEV-Boost component – a third-party client integrated with validator software.

MEV-Boost enables validators to receive blocks from external builders via a network of trusted relays. These blocks are built outside the validator’s node, allowing it to participate in MEV extraction without deploying its own analysis or simulation infrastructure. Flashbots also offers additional tools, including Flashbots Protect and Flashbots RPC, which allow users to submit transactions bypassing the public mempool, reducing the risks of manipulation and alpha leakage.

MEV Extraction Strategies

MEV extraction strategies encompass a broad range of tactics used by searchers to extract value from blockchain structure and user behavior. These strategies range from primitive forms of front-running to more complex scenarios relevant in the context of MEV in DeFi trading. Below are key examples of MEV in blockchain that are applied in practice and classified according to their logic, objectives, and implementation mechanisms.

Front-running and Generalized Strategies

One of the basic MEV extraction strategies is front-running – inserting one’s own transaction before a user’s in order to gain an advantage. In contrast, more advanced approaches are implemented by generalized searchers: specialized MEV bots in Ethereum that are not tied to a specific contract logic and rely on simulating potential outcomes based on the current blockchain state. An example of such a generalized strategy is identifying an arbitrage opportunity between two DEX pools with a minimal price discrepancy. This contrast forms the core of MEV vs front-running, where the former is based on rigid patterns and the latter involves more flexible responses to transaction structure.

Sandwich Attacks

A strategy typical of MEV in defi trading, where two transactions are placed around a user’s swap operation on a DEX. The first initiates a price movement in the desired direction; the second captures the resulting profit. The user receives a worse execution rate due to increased slippage. Sandwich attacks are particularly common in highly liquid pools that lack built-in anti-manipulation protections.

Liquidation Arbitrage

One of the most profitable areas of MEV in defi trading involves participating in liquidations within lending protocols such as Aave or Compound. When the collateral ratio drops below a critical threshold, it creates an opportunity for forced position closure. MEV bots in Ethereum perform sniping in such cases, capturing arbitrage between the current value of collateral and the outstanding debt. Including these transactions requires precise calculation and minimal network delivery latency.

Priority Gas Auction (PGA)

Before the introduction of Flashbots and PBS, the primary method of extracting MEV was the Priority Gas Auction – a mechanism where searchers competed by raising gas prices to get their transactions included. This strategy increased costs and congested the mempool, undermining network stability and worsening conditions for regular users. Although PGA has been largely displaced by more structured approaches, it remains an important part of the history of MEV extraction strategies.

Time-Bandit Attacks

A specific type of MEV involving the ability to rewrite blockchain history to retroactively extract value. These attacks are possible in networks with low finality costs and potential vulnerability to re-orgs. While such scenarios are difficult to execute in Ethereum, they remain a topic of academic and practical interest as part of the boundary model for examples of MEV in blockchain.

MEV Bots in Practice

Modern MEV bots in Ethereum perform a variety of functions – from mempool scraping to dynamic bundle construction. Depending on specialization, bots are categorized as sniping bots, sandwich bots, liquidation bots, and others. Their architecture is becoming increasingly complex, incorporating frameworks like MEV-share and MEV-inspect to enable rapid response and adaptation to changing market conditions.

Impact of MEV on Users and Ethereum Economy

The impact of MEV on Ethereum users manifests through a number of adverse effects resulting from interference in transaction execution order and Ethereum’s architectural specifics. One of the main symptoms is front-running attacks, in which a user’s transaction is preempted by a deliberately crafted operation. This leads to increased slippage, higher gas costs, and worse execution conditions. These mechanisms are particularly critical in DeFi protocols, where precision and timely execution are directly tied to financial losses. 

In addition, MEV risks in Ethereum are reflected in growing centralization: large block builders, relay operators, and RPC infrastructure providers are gaining increasing influence, forming closed ecosystems inaccessible to smaller participants. As a result, the user experience suffers: execution outcomes become less predictable, swap operations incur losses, and fair participation in DeFi is diminished.

Who Benefits from MEV

MEV and miner incentives shape the fundamental profit distribution structure of the ecosystem. Although the term “miner” became historical after the transition to Proof-of-Stake, its economic function persists – now the beneficiaries are validators, who receive blocks from relay services and sign them. 

In addition, a significant share of the profit goes to searchers who implement advanced MEV in DeFi trading strategies – from arbitrage and liquidations to sandwich attacks. Infrastructure intermediaries such as Flashbots and RPC providers (e.g., Infura, Alchemy) also participate in the value extraction chain. It is important to note that the MEV mechanism is zero-sum: one party’s gain comes directly at another’s expense.

MEV Risks in Ethereum

The growing importance of MEV extraction raises the question: how to avoid MEV in DeFi? Current approaches fall into the category of MEV protection solutions, aimed at reducing the visibility of user intent or restricting access to pending transactions. 

One such approach is the use of private RPCs that bypass the public mempool: solutions like Flashbots Protect or Stealth Mode by 1inch help reduce the risks of front-running and alpha theft. 

Another is threshold encryption: encrypted pending transactions that are revealed only after block formation (projects like Ferveo, Suave TE). 

MEV-aware wallets are also evolving, such as CoW Swap or Railgun, which implement protection against manipulation at the wallet level. 

Finally, an architectural trend known as intent-centric design is emerging – a model where the user formulates an intent rather than submitting a finalized transaction. In systems like Anoma, Essential Intents, or CoW Swap, execution pathfinding is delegated to the infrastructure layer, reducing exposure to MEV strategies.

Is MEV Legal in Crypto?

This is a question without a clear answer. Comparisons with TradFi suggest that certain MEV practices resemble payment for order flow (PFOF), high-frequency trading (HFT), or even forms of front-running – all of which are tightly regulated in traditional markets. 

However, the DeFi space lacks a centralized execution mechanism, and the legal framework is less clearly defined. Regulators, including the SEC and FINRA, have not yet developed a unified approach to interpreting MEV. Even in jurisdictions with crypto-specific regulations, legal precedents are lacking. As a result, the boundary between permissible optimization and prohibited manipulation remains unclear, creating a regulatory gray area. That's why each case requires separate review.

Will Ethereum Upgrades Reduce MEV?

There are ongoing research efforts aimed at minimizing the impact of MEV on Ethereum users through architectural changes. One promising direction is SUAVE – an off-chain intent management system that shifts execution planning entirely outside the main chain. Encrypted mempools are designed to hide the contents of pending transactions until block inclusion. 

Inclusion lists and fair ordering are mechanisms that require validators to follow a pre-defined execution order. However, some researchers criticize PBS as a new form of order-flow capture that increases centralization and thus introduces additional MEV risks in Ethereum. As a result, whether future upgrades can truly reduce the scope of MEV remains an open question.

Frequently Asked Questions

1. How Does MEV Work in Ethereum?

MEV arises from the lack of a fixed transaction execution order in Ethereum: validators can reorder and insert transactions, earning profit by exploiting contract predictability and mempool transparency.

2. What Are the Most Common Examples of MEV in DeFi?

MEV in DeFi includes strategies such as sandwich attacks in DEX pools, liquidation arbitrage in lending protocols, and gas auctions for frontrunning. These approaches leverage the properties of the public mempool and contract execution predictability to extract profit at the expense of regular users.

3. What Is the Role of MEV Bots in Ethereum?

MEV bots perform mempool analysis, simulate outcomes, and dynamically construct bundles to implement front-running, arbitrage, and liquidation strategies with maximum speed and minimal latency.

4. What Are the Risks of MEV to Ethereum Users?

MEV creates asymmetry in access to alpha, undermines fair market conditions, and raises the barrier to entry in DeFi protocols. Users face reduced predictability, inability to compete with bots, and lower efficiency of their transactions.

5. What Are Some Protocol-Level Solutions to MEV Risks?

Protocol-level MEV protection mechanisms include encrypted mempools, threshold encryption, and intent-centric protocols. These aim to reduce the visibility of pending transactions and shift the initiative to the user side before their actions become public.

6. Is MEV Legal in Crypto Markets?

The legal status of MEV remains undefined: despite similarities to PFOF and front-running in TradFi, DeFi lacks a clear classification. Regulators such as the SEC and FINRA have not issued definitive interpretations, and each case is treated individually.