The Bank for International Settlements has recently published a research paper and has equated miner extractable value (MEV) to illegal activities in conventional markets such as front running and sandwich trades.
MEV is basically the profits that miners can earn by opting on which transactions to include in a block and in what order. According to the report, profits are made by manipulating market prices through a particular ordering or even censoring pending transactions.
The report highlights that transactions are sequenced in the order they are received in the conventional financial market. Although in the case of blockchains, miners determine which transactions are to be added to a block, and these miners are free to choose and pi8ck from all the transactions in the mempool (memory pool).
And that is why, rather than choosing transactions on the basis of transaction fees where the transactions with the highest fees are added on priority, miners can opt for transactions on the basis of the profit opportunities that they generate.
Furthermore, the report signifies that not only does this profit come at an expense of the other existing market participants, but the miner’s transactions also delay the other legitimate transactions. Hence, it forms an invisible tax on regular market participants.
It then asserted that just like that miners can also engage in back running. This means that a miner can instantly place a sell or buy after a big transaction or market-moving event. And that miners can also get into sandwich trades where miners can place orders both before and after a market-moving transaction.
Estimates in the reports say that the MEV has amounted to approximately $550-$650 Million since 2020 on the Ethereum blockchain solely. And that the actual estimates can be higher. It further stated facts and figures regarding MEV.
Regulators on a global level need to determine if the value extracted by miners should be classified as illicit. And while many jurisdictions count such transactions in the traditional financial space to be against the law. The illegal stance of MEV in most jurisdictions is currently ambiguous.
MEV might surge, which signifies that the miners who engage in MEX would gain more profits and would ultimately crowd the ones who do not. And that MEV, forms an existential risk to the Ethereum ledger’s integrity.
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Source: https://www.thecoinrepublic.com/2022/06/18/bis-report-regulators-gotta-determine-if-miner-extractable-value-mev-is-illicit/