Tuesday, December 5, 2023
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The MEV Gold Rush: How Blockchain Developers Are Racing to Make a Fortune

The MEV Gold Rush: How Blockchain Developers Are Racing to Make a Fortune

Photo: upklyak / Freepik.com
Photo: upklyak / Freepik.com

Blockchain transactions are growing in popularity, and one trend that is causing a stir is Miner Extractable Value (MEV). This is where developers can extract value from block production, excluding or changing transaction orders, in excess of standard rewards and gas fees.

Miner Extractable Value is a complex issue, and opinions vary on its ethical implications, as some consider it a legitimate practice while others think it is harmful. In this article, we will explore MEV in more detail and how developers can profit from it.

MEV involves a financial ecosystem in which different parties interact to extract potential profits. Decentralized finance (DeFi) apps such as Uniswap and Sushiswap, lending markets such as Compound and Aave, and various cryptocurrencies all form part of this ecosystem.

The potential energy that lies in this ecosystem can be extracted by developers, even if they are not miners or validators, which is why MEV is such a polarizing topic. One way that developers can profit from MEV is through decentralized exchange (DEX) arbitrage.

Cryptocurrencies are highly volatile in price, and this presents an opportunity for arbitrage. Developers can buy a cryptocurrency on one exchange and sell it on another for a profit.

By doing this repeatedly, the profit can accumulate, and developers can make a substantial amount of money. Flash loans, where developers can borrow millions of dollars of cryptocurrency with zero money down as long as they pay it back in the same transaction, enable them to take advantage of MEV in this way.

A Legitimate Way to Profit or Ethically Questionable?

While some view DEX arbitrage as a legitimate form of MEV, others have ethical concerns about it.

Some argue that it is simply bringing these markets to efficiency, and prices are more in line with each other. This is because exchanges can fall out of sync, and by taking advantage of the price discrepancies, developers are providing a service that makes the markets more efficient.

Another way to profit from MEV is through DeFi liquidations. Lending markets, such as Compound Finance, allow users to deposit cryptocurrency and borrow it.

However, they must first deposit more cryptocurrency as collateral than the amount they wish to borrow. When the value of the collateral drops below a certain threshold, the lending market will automatically liquidate the collateral and repay the borrowed amount. Developers can predict these liquidations and profit from them.

For example, suppose a user deposits $10,000 worth of cryptocurrency as collateral and borrows $5,000. If the value of the collateral drops to $5,000, the lending market will liquidate the collateral and repay the borrowed $5,000.

How MEV is Changing the Game for Web3 Developers

Developers can exploit this by predicting when these liquidations will occur and then buying the collateral at a discount before selling it for a profit. The ethical concerns of this method of MEV are also debatable, but some argue that it is legitimate as it can prevent systemic risks in the lending market.

MEV is a complex issue, and opinions differ on its legitimacy and ethics. Some forms of MEV, such as DEX arbitrage and DeFi liquidations, are more widely accepted than others. However, developers need to understand that there are ethical implications to consider when engaging in MEV.

Nevertheless, MEV is a trend that is unlikely to disappear soon, and developers will need to stay informed to stay ahead in this evolving landscape.