Why Maximal Extractable Value Matters

Behind the scenes of most major blockchains, shadowy super-coders and the bots they build are using the transparency of blockchains and the transaction fee market to their advantage. By watching a database of all pending and unconfirmed transactions called the mempool, the bots are able to pay higher transaction fees to slip in their own transaction in an order that is profitable, often at the expense of decentralized finance (DeFi) users.

According to the Ethereum Foundation, Maximal Extractable Value (MEV) is the catch-all phrase for “the maximum value that can be extracted from block production in excess of the standard block reward and gas fees by including, excluding and changing the order of transactions in a block.” More specifically, arbitrage, liquidations, frontrunning and sandwich attacks are all forms of MEV in its current state.

MEV is not inherently bad and exists in any transaction fee market-driven chain with open access to the mempool. Decentralized exchanges and lending protocols even rely on MEV to arbitrage pools and liquidate undercollateralized loans in a competitive and efficient manner. The ability to order transactions within a block also casts a dark cloud over MEV because searchers are able to front run buy orders just to simultaneously sell on the trader after the order goes through. Searchers may earn an extra percent on the transaction, but it is completely at the expense of the trader who overpaid for the asset they received.

Welcome to another issue of Valid Points.

– Teddy

Pulse check

The following is an overview of network activity on the Ethereum 2.0 Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on Eth 2.0 metrics.

Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.

Validated takes

A Coinbase engineer has assured users the exchange is working on a solution for staking service client concentration. BACKGROUND: The conversation around client diversity continues to heat up as Prysm-style validators take an increasingly large cut of block production. Community members look to hold staking providers like Coinbase and Kraken accountable for the health of the network. Large exchanges are in control of around 30% of validators and have heavily leaned on the usage of Prysm, adding unnecessary risk to the network.

The Ethereum Foundation released a breakdown of validator distribution thresholds in light of client diversity issues. BACKGROUND: Ethereum’s multi-client nature allows the network and validators to protect themselves against software failures. Ideally, no client would be run on over 33.3% of the network’s validators, assuring that a bug within any of the several clients could not disrupt finality. However, if a client makes up over 66.6% of the network like Prsym, it has the potential to finalize bugs and cause avoidable chain splits down the road, financially punishing anyone using the majority client.

OpenSea ended January with over $4.9 billion in NFT trading volume on Ethereum for the month. BACKGROUND: Non-fungible token trading came back with a vengeance in January, with OpenSea volume 44% higher than the previous most-active month. While we are only one month into the new year, OpenSea is on pace to bring in nearly $1.5 billion in revenue during 2022. The figure is even more impressive when accounting for the $900 million in volume done on recently launched platform, Looksrare.

Blockscan introduced off-chain wallet-to-wallet communication on Etherscan. BACKGROUND: Communication between wallets has been very difficult and has required on-chain transactions in the past. Blockscan allows wallet users to remain anonymous but also to reach out and respond to other wallets within the Etherscan website.

Factoid of the Week

Open comms

Valid Points incorporates information and data about CoinDesk’s own Eth 2.0 validator. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.

You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:

0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.

Search for it on any Eth 2.0 block explorer site!