Bank for International Settlements Explains MEV and Ethereum Market Manipulation


“Minor Extractable Value” or MEV and its effects is one of the open secrets of the industry. And the Bank for International Settlements recently released a document entitled “Miners as intermediaries: extractable value and market manipulation in crypto and defy”To explain the phenomenon and its risks. In it, they define MEV as “the profit that miners can take from other investors by manipulating the choice and sequencing of transactions added to the blockchain.”

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The paper focuses on the Ethereum blockchain. How popular is the practice there? “MEV is so widespread that, occasionally, one in 30 transactions is added by miners for this purpose.” Aha! So much more. How much do miners take part in? “Since 2020, the total MEV on the Ethereum network alone has been estimated at USD 550-650 million, according to two recent estimates.” And keep in mind, “These estimates are based solely on the largest protocol and therefore may be shortened.”

The operation is still not illegal

This is why MEV warns you, “Not only do these gains come at the expense of other market participants, but mining transactions also delay other legitimate transactions.” How is the operation a gain, though?

“By manipulating market prices through a specific order – or even censoring – pending transactions. Since the register is universally observable, these forms of market manipulation can be seen, even if the underlying identities of the miner or the other party in question remain unknown.

In a senator blockchain, “theoretically, miners should select and order transactions based solely on fees.” Not in this case, though. It’s as simple as that, “a number of different users make buy-sell transactions in MemPool and miners can choose which orders to include in this block.” Under this instance, “transactions are not ordered based on fees, but on the profit opportunities they create for mining.”

If this sounds awful and destroys your trust in the system, then this is the reason it should be done. However, it is still not illegal. Here’s how it works:

“MEVs can therefore be likened to illegal front-runners by brokers in a traditional market: if one observes a large pending transaction in a mine memo that will significantly shift the market value, it may add a corresponding buy or sell transaction just before this large transaction, which The result is profit.

Is this whole thing valid? Not entirely, however, it is not particularly illegal.

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ETH price chart for 06/17/2022 on FTX | Source: ETH/USD on

Problems with MEV

First, “there are a number of open questions about whether the current regulation of internal transactions is directly transferable to the MEV.” Why is that? Because, “unlike traditional markets, anyone participating in such an ecosystem adopts rules encoded in its protocol.” If code is law, MEV should not be a problem.

However, code may be the law for users. When it comes to authorities, the BIS believes that “regulatory bodies around the world need to determine whether the extraction of money by miners constitutes illegal activity. In most jurisdictions, activities such as front-runners are considered illegal.” At the time of writing, the MEV exploiting “bot” is now active on various decentralized exchanges. “

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In addition, BIS considers that “MEVO poses a significant problem for the industry, as it conflicts with the concept of decentralization.” How does it work, BIS? “While blockchain decentralized governance may be useful for less trust in certain settings, it imposes considerable costs on users and on allocation efficiency.” Okay, maybe smart contract-enabled blockchains like that. None of this concerns Bitcoin.

What is BIS solution? They say “MEV and related issues can be addressed with approved distribution laser technology, based on a network of trusted intermediaries whose identities are universal.” What are you waiting for? Traditional systems are approved and identities are universal, why would you rebuild it with an inefficient blockchain attached to it?

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