Exploiting weaknesses in some blockchains, coupled with the general lack of awareness among most cryptocurrency investors, has created fertile ground for astronomical, effortless profits.
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When pyramid schemes polluted the minds of less educated and unaware communities with illusions of astronomical profits, all participants and activists in this field unanimously believed they had found a real, lucrative, modern, and dream job.
The underlying truth behind this business model was that for the top of the pyramid to become wealthy, an ever-growing number of financially ruined individuals had to be added to the bottom. The vicious cycle of money circulation, the loss-making nature of the model for most participants, the lack of real services, and the disruption of economic cycles turned the Ponzi business model into one of the most cunning forms of modern fraud.
The topic we aim to discuss here is reminiscent of pyramid schemes. Exploiting the more deliberately created vulnerabilities in certain blockchains, combined with the ignorance of most crypto investors, has provided a fertile and comfortable ground for effortless astronomical profits. Let’s familiarize ourselves with this concept and see whether this model will remain profitable for some indefinitely or if blockchains will be forced to reform it.
We leave the judgment on the MEV business model to you.
The Hidden Mechanism of MEV and Its Implications
“Maximal Extractable Value” (MEV) refers to the maximum profit a miner can achieve by rearranging, including, or excluding transactions when producing a block.
MEV serves as a metric to evaluate the efficiency and security of blockchain networks, demonstrating the extent to which transaction ordering within a block can be manipulated to benefit a specific party. This concept encompasses competition among miners, trading bots, and sandwich attacks.
While this system may appear harmless on the surface, in practice, it negatively impacts the security and, particularly, the fairness of the network, as we will examine further.
Who Pays the Hidden Tax?
Maximal Extractable Value (MEV), under the guise of competition for higher profits, has effectively turned into an attack on some blockchain networks, including Ethereum. Here’s how it works: Before being added to blocks on the network, transactions are placed in a pool called the mempool. This repository of transactions is waiting to be selected by network validators for inclusion in a block.
Validators decide the order and timing of transaction execution. All transaction requests across the network must await their approval. This gives validators full visibility into the contents of the mempool. For instance, if they see a large buy or sell order from users or whales, they can easily place a smaller transaction immediately before the larger one. By leveraging the price movement caused by the larger transaction, validators can earn significant profits.
Two critical factors make these profit opportunities possible:
- High Block Time: The longer the interval between block creations on a blockchain, the longer transactions remain in the mempool awaiting validation. This extended wait time allows bots to monitor specific orders and execute trades accordingly.
- Transaction Prioritization Flexibility: On networks like Ethereum, validators can reorder transactions within a block, allowing them to manipulate the sequence to their advantage.
For example, suppose a whale decides to purchase a large quantity of Ethereum under specific market conditions. This transaction, expected to cause a price increase, is initially queued as the first transaction in the block. However, the validator creates its transaction, assigning it a higher priority, so it executes first.
Validators can further exploit this opportunity by using flash loans for high liquidity, which enables them to execute profitable trades without needing upfront capital. These loans are funded by liquidity pools containing user assets, allowing validators to act without risking their funds.
By doing this, the network validator essentially rides on the whale’s back, profiting from Ethereum’s price increase in the market. Similarly, when they observe a large sell order, they place their sell order ahead of the heavy transaction to exit the market before the price drops. This ability allows validators to generate significant profits easily.
Ethereum’s high block time (10–20 seconds), combined with the ability for validators to reorder transaction priorities within a block, has turned the Ethereum network into an MEV paradise. Network validators effectively extract this “hidden tax” directly from users’ pockets.
The Main Cause of Ethereum Gas Fee Increases
Gas Fee refers to the transaction costs on the Ethereum network, paid to execute a transaction or a smart contract successfully. It also measures the computational effort required for specific operations.
One of Ethereum’s features is allowing users to offer higher gas fees to prioritize their transactions, ensuring faster execution compared to others. On the surface, this auction-like mechanism creates competition, with gas prices being determined by market demand.
However, this solution has led to significant inequality. Network validators, aiming to ensure their transactions are executed before large ones, consistently win this bidding war. This is one reason why Ethereum’s major stakeholders rarely voice concerns over network congestion or rising gas fees.
With the introduction of Ethereum 2.0 and newer solutions, such as burning a portion of the gas fees, this problem has been partially mitigated. However, since users can still expedite their transactions by paying higher gas fees and fees rise during network congestion, the exploitability of the variable gas fee strategy will not be entirely eliminated.
Is Such a Lucrative Loophole Accidental?
Ethereum developers claim that the variability of gas fees and the flexibility to reorder transaction priorities are designed to create competition among miners and encourage them to maintain the Ethereum network and validate transactions.
However, let’s examine a few points together:
In a network like Fantom, transactions are added to blocks in the exact order users submit them, with no option to change their priority. Additionally, Fantom’s low block time (around 1 second) leaves no room for validators to exploit MEV opportunities and pocket hundreds of millions of dollars.
As the network grows busier, block times decrease further, making MEV even harder to exploit. If this feature is genuinely advantageous, why have popular networks like Binance Coin (BNB), Solana (SOL), Fantom, and others launched after Ethereum implemented stricter limits on MEV attacks?
Ethereum 2.0’s rollout consists of several key stages:
Phase 0: Beacon Chain: Launched in December 2020, this phase allowed users to start staking Ethereum and become network validators.
Phase 1: Merge: On December 15, 2022, Ethereum merged the Beacon Chain with the main network.
Phase 2: Sharding: This stage aims to increase transaction speeds to 100,000 transactions per second by splitting large-scale data into smaller shards for easier and faster processing. Originally planned for the end of 2023, it has been delayed to May 2024.
Despite Phase 0 being an ideal opportunity to reform validator behavior, no measures were taken. Furthermore, the sharding phase, which is intended to simplify data processing, does not mention stopping the ability to reorder transactions. Thus, even after Ethereum 2.0’s full implementation, MEV attack opportunities will persist.
Suppose the ability to spot high-value transactions is considered a feature. Why isn’t this information public for all users during the critical window when transaction priorities can be manipulated? For example, why not broadcast such information on platforms like etherscan.io?
If such golden opportunities were accessible to everyone, the collective buying activity would raise the market price before the whale’s transaction is even executed. This would leave no profit for the whale and disrupt the market’s price structure entirely.
With increasing user awareness and forming communities on social platforms like Twitter (X)—where user posts and opinions cannot be easily erased—projects can face significant pressure to implement measures minimizing MEV attack opportunities.
Whenever a blockchain network offering smart contracts is introduced, users and investors should ask: What is this project’s solution to prevent validators from exploiting MEV? Without such safeguards, MEV will continue to serve as a privilege for validators, granting them disproportionate profits as blockchain networks grow busier. This unchecked exploitation steers projects away from building healthy, scalable structures—the core philosophy of blockchain technology—and turns them into a modern Ponzi-like quagmire.
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