Author: Techub Selected Compilation
Written by: Sumanth Neppalli, Decentralised.co
Translation: Yangz, Techub News
In 2010, Google launched a second-price auction system for advertisements, where the highest bidder wins the ad space but only pays the second-highest bid.
This seems like an ideal model for economists, helping to avoid excessive bidding by advertisers. However, secretly, Google manipulated the auction mechanism to gain millions of dollars in hidden profits. For example, when the highest bid was $20 and the second-highest was $16, the winning bidder only had to pay $16. Yet, Google actually paid the publisher the third-highest price (let's say $10), pocketing the $6 difference. These funds flowed into a secret account called the 'Bernanke Pool,' used to meet corporate goals like Wall Street expectations. It wasn't until the antitrust lawsuit in 2016 that this operation was exposed. Although Google switched to a first-price auction system in 2019 (settling with publishers at the highest bid), this lesson remains profound: when the auctioneer controls the underlying rules, even the most perfect mechanism can be distorted. Interestingly, the cryptocurrency world is replaying this scene. The blockchain is facing its own 'Bernanke moment'—the Maximum Extractable Value (MEV), or the profits obtained through reordering or adding/removing block transactions, has become the most critical yet least understood phenomenon in the cryptocurrency space. Like Google's covert auction manipulation, this value extraction is outside the view of ordinary users, yet it affects all participants in the blockchain, creating a sort of 'invisible tax.' Will MEV follow in Google's footsteps towards opaque operations and centralization, or can it evolve into a transparent decentralized system that rewards users? Can we design a mechanism that allows value extraction to reinvest in the ecosystem rather than concentrating wealth in the hands of a few? Let's delve deeper.
The Physics of Delay
The blockchain is a decentralized network composed of thousands of validating nodes (validators or miners) worldwide. These nodes undertake dual roles: serving as communication hubs to receive and broadcast transactions, and as computational terminals to execute and validate transactions. Due to the global distribution of nodes, there is inevitably communication delay between validators—this is a physical bottleneck dictated by the speed of light. To ensure all nodes follow the same transaction order, each blockchain sets a 'block time': a validator is chosen through a consensus mechanism (like proof of stake) to propose a new block, and the remaining validators accept the block after confirming transaction compliance. After each block is produced, the proposal rights rotate among the validators to maintain network security. For instance, Bitcoin produces a block every 10 minutes, while Ethereum speeds the pace to 12 seconds, Solana attempts to break the 400-millisecond limit, and Layer 2 solutions like Arbitrum are challenging the ultra-high-frequency range of 10-250 milliseconds. Regardless of the length, each block time window creates opportunities for validators to reorder transactions for profit rather than prioritize user fairness. Ideally, the 'first-come, first-served' principle should be followed, but due to the nature of globally distributed nodes, this principle is difficult to achieve. When a user initiates a transaction, influenced by network delays, it is nearly impossible for all nodes to receive the transaction simultaneously. This means that even if the block-building rules are fully adhered to, unfair transaction ordering (leading to users paying extra fees, with MEV arbitrageurs intercepting price differences) may still be included in the block.
MEV (Maximum Extractable Value) refers to the profits that block producers (miners in proof of work or validators in proof of stake) and other participants (by bribing block producers to prioritize user transactions) can obtain through strategically adjusting the order of transactions within a block.
MEV: The Secret Profitable Business
Suppose Joel is using a DEX like Uniswap to buy ETH at a price of $1800. He sets his slippage tolerance to 10%, meaning he can accept the price rising to $1980 at the time of transaction completion. Joel's transaction first enters the mempool—this is the public waiting room for pending transactions, waiting to be packed into a block. At this point, a trading bot notices his transaction and immediately copies the order, paying a higher gas fee to 'cut in line' (a higher gas fee is essentially a bribe to the validators to ensure this transaction is executed before Joel's). When the bot's buy order pushes the ETH price on the DEX up to $1900, Joel's transaction finally executes at this inflated price. The bot then sells the ETH back to the liquidity pool at this price, pocketing the price difference (after deducting gas fees). Ultimately, although Joel bought ETH, he overpaid by $100, which went into the bot's pocket. Similar operations play out thousands of times a day in the cryptocurrency market.
One extreme example is when a trader forgot to set their slippage tolerance, leading a bot to capture $200,000 in profit from a single trade. The 'culprit' in this incident is jaredfromsubway.eth, who consistently pays the highest gas fees on Ethereum to always execute before the trades they want to target. Statistics show that Jared has profited over $10 million from such MEV attacks.
MEV primarily manifests in three forms:
Arbitrage trading: Discovering price differences between different exchanges and buying low and selling high within the same block. For example, when ETH is priced at $2500 on Uniswap and $2510 on Sushiswap, a bot can execute buy and sell operations within the same block, making a risk-free profit of $10 per ETH. It is important to note that such operations are actually beneficial to the market as they promote price convergence across platforms.
Sandwich attack: A bot observes that Alice has placed a large buy order in the mempool, buys in advance to push up the price, and then immediately sells after Alice completes her trade at a higher price. The bot profits from the price difference, while Alice incurs slippage loss. The earlier mentioned case where Joel overpaid by $100 is a typical sandwich attack, and this extra expenditure ultimately translates to profit in the MEV value chain. Such operations clearly disadvantage users, making them pay unnecessary additional costs.
Liquidation arbitrage: In lending protocols, when a position reaches liquidation conditions, MEV extractors rush to be the first liquidator to earn rewards. For example, if Saurabh uses $15,000 worth of ETH as collateral to borrow 10,000 USDC, when the ETH price drops causing the collateral value to fall to $11,000, liquidation is triggered. At this moment, a bot immediately repays $5,000 of the USDC loan and receives ETH worth $5,500 (including a 10% liquidation reward), easily making a profit of $500. The impact of such operations is two-fold: from the perspective of maintaining the health of DeFi systems, liquidation mechanisms are necessary; however, the vast majority of the profits ultimately go to the validators.
From $550 million in 2021 to $1.1 billion in 2024, the scale of MEV extraction has doubled. With an open mempool and deep DeFi liquidity, Ethereum remains the main battleground for MEV, hosting over 100 active bots that account for about 75% of MEV extraction activities. Data from the past 30 days shows that sandwich attacks made up 66% of the total MEV on Ethereum, arbitrage trading accounted for 33%, while liquidation arbitrage was less than 1%. As on-chain transactions expand to other public chains, MEV is spreading alongside. Solana, BNB Chain, and Ethereum Rollup networks have all become hunting grounds for arbitrage bots; even CZ faced a sandwich attack while swapping tokens. In just the past 30 days, sandwich bots on Solana have made over $4 million (24,000 SOL), 50 times the earnings of similar bots on Ethereum ($80,000) during the same period.
Additionally, the rise of cross-chain bridges has elevated this game to an 'inter-chain relay race.' Arbitrage bots are now rapidly switching between ecosystems, chasing every dollar of potential profit. In December 2024 alone, influenced by market fluctuations triggered by Trump's re-election campaign, the scale of MEV activity on Solana exceeded $100 million.
MEV Supply Chain
The two major privileges early blockchains granted to validators (deciding which transactions can enter the next block and controlling the order of transactions) remind me of the 'dark pool' issue in Flash Boys. Just as stock exchanges open privileged channels for high-frequency traders, validators can secretly collude with bots to ensure that the bots' transactions are executed before ordinary users. This 'paid front-running' mechanism leads insiders to always achieve optimal pricing, while ordinary users can only receive worse prices. To alleviate this centralization risk, the Ethereum ecosystem is shifting towards a 'Proposer-Builder Separation' (PBS) solution, dismantling the functions of block building and on-chain operations.
Users submit transactions or high-level intents (e.g., 'exchange token A for token B at the best rate')
After processing transactions, the wallet sends them to seekers/builders/mempool through nodes.
Seekers scan the mempool for arbitrage opportunities and bundle related transactions.
Builders integrate transaction packages and hold block auctions.
Validators (proposers) select the block with the highest profit, verify the validity of all transactions, and then add them to the chain.
This role separation weakens the power of validators. They can only choose from pre-sorted blocks, broadening the distribution of MEV opportunities and forming a competitive block-building market. The most widely adopted PBS solution is MEV-Boost developed by Flashbots, which has been adopted by over 90% of Ethereum validators as of early 2025. The evolution of the term from 'Miner Extractable Value' (MEV) to 'Maximum Extractable Value' signifies that the arbitrage actors have expanded from miners to all roles within the ecosystem. When you click 'swap' on a DEX, whether using an automated market maker (AMM) like Uniswap or an order book model like Raydium, your counterparty is almost certainly not another ordinary user. Behind the scenes, professional market makers (like Wintermute) earn the spread by providing liquidity. In the AMM mechanism, they earn transaction fees by injecting cryptocurrency into liquidity pools. Attempting to eliminate MEV is unrealistic as it is deeply embedded in the economics of block time. On one hand, arbitrage activities maintain price consistency between CEX and DEX, even subsidizing network security through MEV tips; on the other hand, sandwich attacks and gas fee bidding wars force ordinary users to pay higher costs. MEV is an inevitable product of an efficient market; where there is profit potential, there will be someone to seize it. The current ecosystem favors professional seekers, block builders, and market-making bots, while the costs are borne by ordinary traders who are frontrun, incur additional slippage, or face liquidity shifting into un-auditable 'dark pools.' Bots submit transactions to the mempool at millisecond speeds to compete for MEV opportunities, and this delay race not only clogs the mempool with garbage transactions and wastes bandwidth but also drives up fees, becoming an invisible tax on every swap. The crux of the issue is not in eliminating MEV but in deciding who gets these profits and under what conditions.
Strategies to Reduce MEV
To address the MEV issue, the industry has explored four main strategies: concealment, exploitation, minimization, and redirection. Each solution involves different trade-offs between efficiency, fairness, and technical complexity.
MEV Concealment Strategies
The simplest solution is to keep transaction information hidden before packaging. Tools like Flashbots Protect and Cowswap MEV Blocker are designed for this purpose. Through these services, transactions are sent directly and privately to block builders rather than being publicly exposed in the mempool. Arbitrage bots cannot detect their existence before transactions are executed. However, the cost of this strategy is that one must wait for validators adopting this service to be selected as proposers. In the case of Flashbots Protect, this process can take up to 6 minutes (though users can cancel unexecuted transactions at any time since they never enter the public mempool). Market makers and large traders typically use such services to avoid premature exposure of trading strategies. To date, the amount processed through Flashbots Protect has exceeded $43 billion.
I remain cautious about such centralized privacy solutions, as they always remind me of dark pool trading in traditional finance. Mechanisms initially designed to protect users often evolve into 'Robinhood-style' insider privileges. Currently, Flashbots and Beaverbuild are developing hardware solutions based on Trusted Execution Environments (TEE), which aim to prove their honesty through cryptography. This direction holds great promise, but has yet to undergo large-scale practical validation. Additionally, some communities have begun to take proactive measures. The BNB community voted to establish a 'Good Will Alliance,' requiring validators to only accept blocks submitted by builders that comply with MEV standards. These builders will filter transactions that have MEV exploitation characteristics, and the system will impose penalties on validators that do not adopt compliant infrastructures.
MEV Exploitation Strategies
Rather than completely eliminating MEV, some protocols attempt to weaponize arbitrage competition through private auction mechanisms, balancing hunters against each other. Imagine a scenario where Joel wants to exchange 100 ETH for USDC. In the traditional AMM model, this transaction enters the public mempool, exposing it to the risk of sandwich attacks. But in the Request for Quote (RFQ) model, Joel sends the exchange request to a market maker network: suppose Wintermute quotes $2000 per ETH, and DWF Labs quotes $2010. Joel would accept the better quote and transact at $2010, completely avoiding slippage and frontrunning risks. Behind the scenes, each market maker is calculating the potential profit from this trade. They mobilize multi-source liquidity to provide the best quotes while suppressing competitors, all while maintaining profits. However, the RFQ system has inherent flaws, requiring a 24/7 online market maker network for real-time responses. If there aren't enough participants, the system may become sluggish, and users may miss opportunities due to market fluctuations. RFQ is more commonly used in illiquid areas like fixed income bonds. More critically, if the market maker alliance lacks credibility or decentralization, RFQ may devolve into a new insider club. To address this, Pyth has developed an off-chain market called Express Relay on Solana, allowing all protocols to access competitive market maker pools. DeFi applications do not need to integrate with each market maker individually, minimizing MEV while outsourcing trade execution. On the other hand, Jito now controls over 90% of the staked SOL by choosing a different path. We previously reported that Jito tried to establish a mempool on Solana but abandoned it after attackers spent $300,000 to buy block priority. Now, Jito holds off-chain auctions every 200 milliseconds, filtering the most profitable trades and packing them into the next block. Users can purchase a fast lane against MEV attacks by paying a 'priority fee,' and these fees constitute nearly half of Solana validators' income.
MEV Minimization Strategies
This solution builds further on order flow auctions, fundamentally reducing the total amount of MEV that can be extracted through clever auction design. The traditional per-transaction processing mode creates opportunities for MEV—bots can observe each transaction and insert arbitrage operations. However, batch trading protocols pack multiple orders to be executed at a uniform price simultaneously. Since all orders are settled at the same price within the same batch, MEV bots cannot profit from order sorting or timing differences.
The batch trading mechanism pioneered by CoWSwap is based on a simple insight: when user A wants to exchange ETH for DAI, and user B wants to exchange DAI for ETH, both can directly match without going through an exchange. The protocol collects trading intentions within a short time window, prioritizing matching these natural hedge needs, and then utilizes on-chain liquidity to process the remaining trades. Even more impressively, traders do not need to be deeply knowledgeable about the crypto market structure. When using CoWSwap, users do not have to adjust complex parameters like slippage tolerance or cross-pool routing; they simply declare their trading needs. Solvers (acting as professional market makers for auction settlement) compete to provide the best quotes, and all traders in the same batch enjoy the same asset price. Currently, CoWSwap has processed approximately $100 billion in trades. Its leading solver, Barter (with about 15% market share), has handled over $11 billion in volume through this protocol, showing a stable growth trend. This growth underscores the effectiveness of the batch auction mechanism in reducing MEV; the success of solvers like Barter relies on price competition within a fair and uniform execution environment rather than on trading sequence exploitation.
This mechanism aligns with the research of Professor Eric Budish at the University of Chicago Booth School of Business. He argues that batch auctions occurring once per second can eliminate the speed competition of high-frequency trading: 'Batch processing also resolves the prisoner's dilemma inherent in continuous order book markets and allocates the welfare gains to investors.' In the cryptocurrency domain, traditional continuous order book models (like those used by most DEXs) reward the fastest traders, leading them to continuously invest in better hardware, faster bots, or more direct node connections, but these investments do not enhance user experience. The batch auction logic employed by CoWSwap executes all trades within fixed time windows at uniform prices, nullifying speed factors and truly focusing on price discovery and user value.
MEV Redirection Strategies
Some innovators have adopted a more pragmatic approach: if MEV extraction cannot be stopped, why not capture it and return the profits to the community? Arbitrum's TimeBoost exemplifies this idea. The protocol establishes a 'fast lane' of 200 milliseconds, allocating usage rights through sealed second-price auctions every minute. Like a VIP checkout lane at a supermarket, the highest bidder can prioritize their transaction processing within a short time window. Seekers wishing to have their transactions prioritized can bid for this fast lane by predicting the MEV potential within a 60-second window without participating in chaotic gas fee bidding wars.
This mechanism fundamentally changes the attackers' situation; they now miss the opportunity to capture MEV profits from anyone using the fast lane. As auctions frequently rotate among all seekers, forming extraction monopolies becomes nearly impossible. This system transforms MEV from an invisible tax into a public good, with 97% of TimeBoost's revenue flowing into the ARB DAO treasury, expected to yield an annual income of $30 million. Additionally, Jito, mentioned earlier, also employs a hybrid model where 3% of transaction priority fees are redistributed to the Jito DAO and JitoSOL stakers.
The Path to Choosing MEV Auction Mechanisms
Currently, there are five core auction designs in the MEV space, using three participants (seekers/solvers/builders) bidding for block space as an example, assuming each has private valuations of $100, $80, and $60 respectively.
There is no universally 'optimal' auction scheme; the key depends on the protocol's goals.
Maximizing Revenue: Choosing Sealed First-Price Auctions
Community Credibility and User Stickiness: Adopting a Layered Mechanism of 'Base Fee + Intent Unified Price' Similar to EIP-1559
Breaking the MEV Extraction Monopoly: Promoting High-Frequency Batch Auctions Where Price Rather Than Speed Determines the Outcome
Speed-sensitive scenarios like DEX: Private order flow is the optimal solution.
The Road Ahead
The strategy of hiding order flow and auctioning it to private market makers sounds familiar; the dark pool story of Wall Street is re-enacting on-chain. As cryptocurrency becomes increasingly institutionalized and merges with traditional auction models, this trend may accelerate.
Only the top teams can take on the roles of seekers, builders, or solvers. This technical advantage will accumulate over time, giving large institutions with cutting-edge infrastructure and machine learning algorithm development teams a structural advantage. Traditional market makers like Morgan Stanley and Goldman Sachs may also join the fray. Currently, various chains have begun to express their stance on the MEV issue: Solana, pursuing ultra-low latency, tends to adopt a private order flow mechanism similar to Nasdaq's speed advantage; Ethereum adopts PBS and MEV-Boost for democratized access; while other public chains are exploring new directions based on their architectural characteristics.
In my view, the most groundbreaking innovations may occur on Layer 2. As Arbitrum TimeBoost has demonstrated, L2 can experiment with various auction designs and value distribution models more freely.
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