One key concept in the world of blockchain is Maximum Extracted Value (MEV), which refers to the potential profits that can be realized through the manipulation of blockchain transactions. In this post, we will explore the concept of MEV in more detail, including its definitions, mechanisms, and implications for the blockchain ecosystem. Note, this will be the first of two posts about MEV.
This can occur through a variety of mechanisms, including frontrunning, transaction ordering, and arbitrage.
Frontrunning refers to the practice of executing trades based on knowledge of forthcoming transactions. For example, a trader might observe that a large transaction is about to be executed on a blockchain, and then quickly place a trade ahead of the larger transaction in order to profit from the price movement that is likely to occur.
Transaction ordering refers to the practice of manipulating the order in which transactions are processed on a blockchain. By prioritizing certain transactions over others, traders can potentially profit from price differences between different exchanges or markets. This also can build a healthier system for example the chain can agree to liquidate accounts before executing specific trades which helps add liquidity to the overall market.
Arbitrage refers to the practice of profiting from price differences between different exchanges or markets. In the context of blockchain, arbitrage opportunities can arise when prices for the same asset vary significantly between different exchanges or marketplaces. This is a healthy form of MEV.
It is worth noting that MEV is not inherently nefarious, and can be generated through legitimate means such as market making or liquidity provision. However, the potential for profit through manipulation has raised concerns about the potential for abuse and market manipulation in the blockchain ecosystem. We will go in depth in later posts specifically around MEV on the Cosmos ecosystem.
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