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Years of research and development will come to a head next month with the Merge. This is when the Ethereum blockchain will switch from the proof-of-work consensus mechanism to the proof-of-stake consensus mechanism. There are many reasons to be happy that the energy-intensive process of mining ether (ETH) is coming to an end.
Perhaps most importantly, the Merge could have an effect on a problem that has always been a problem for the Ethereum blockchain: how much value a miner can get out of it. This process, which is more commonly known as MEV, is the foundation of a secretive industry built on getting value out of block production. Since 2020, it has brought in more than $500 million.
To start, we have to dive into the mysterious world of the "mempool," which is short for "memory pool."
When you do a transaction on the Ethereum blockchain, it will be added to the mempool, which is like a waiting room at the doctor's office. They wait there until a miner adds them to the next block. When a block is full, it is added to the chain and you get a message that your transaction was successful.
So far so good. Well, it turns out that the mempool is not what you would call a "safe space." Because there are smart bots hiding in there that want to take advantage of arbitrage opportunities and leave you paying the bill.
Explaining MEV
The "sandwich attack" is one of the bots' sneakiest ways to get what they want. This is when a bot sees a big trade, copies it, and gives a small tip to the miner so that their trade goes before the target.
Let's look at a possible situation. You have 10 ETH and want to buy 2,000 exampleCoin tokens (EC). So you go to your favorite decentralized exchange (DEX) to make the trade.
When you make a trade, it goes into the mempool, where a bot can find it. It makes an exact copy of your trade and pays the miner a "priority fee" (read: a bribe) so that their trade gets processed before yours. So, the bot buys 2,000 ETH for 200 ETH each.
It's your turn now. You thought you would get 200 EC per ETH, but the bot ran ahead of the transaction and changed the price, so you only got 199 EC per ETH. So for your 10 ETH, you get 1,990 EC.
The price of exampleCoin will change again after your transaction is complete. This time, you can buy 198 EC with 1 ETH. This means that the bot can sell its 2,000 EC for 10.1 ETH, making a quick 0.1 ETH profit.
This may not seem like much, but these bots run all the time, and front-running transactions can be very profitable over time.
There are many other, even smarter ways that mempool-roaming bots use to move around. Maximum extractable value is the name for all of these actions, many of which are just as hard as front-running.
MEV has become a big problem for people who actually use Ethereum, and there is no clear way to fix it. These algorithms are very profitable and easy to code. In fact, MEV-explore has a dashboard that tracks this action, and it shows that these exploits have made nearly $700 million since January 1, 2020, when records started.
It's hard to keep an eye on this situation because doing so would require a centralized agency, which goes against Ethereum's philosophy of being decentralized. But third parties have come up with ways to keep users safe from these tricks.
For example, Flashbots Protect has something called a "RPC" that lets you send transactions through a private server instead of the public mempool. In the same way, stakers who use The Eden Network's service can connect to a network where their transactions are handled privately.
Proof-of-stake
When the Merge is done, MEV will be different than it is now. With the coming proof-of-stake system for Ethereum, there will be a new player: the block builder. They are the ones who order transactions and send them to the person who makes the blocks for final approval.
In the proof-of-work (PoW) system, miners decided how the transactions that came out of the memepool should be put in order.
Since each block is made up of transactions, and each transaction has its own fees and bribes, the value of each block depends on the transactions it contains. So, block builders have an incentive to build the most valuable blocks, since block producers will prioritize and confirm those blocks first.
Several protocols are already trying to get a piece of the new block building market, and this could become a very profitable business. The goal of MEV Boost is to make MEV extraction easier and more fair for everyone.
Without getting into the details, if a protocol can make the most profitable blocks, the people who make blocks will finish theirs first. This could get more people to use their service, giving them a bigger private pool of transactions from which to choose and letting them make even better blocks. A virtuous circle ensues.
It seems strange that the way to stop bots from taking advantage of Ethereum's open and trustless system is for professional teams to take advantage of it better than anyone else and give the benefits back to users, like Robin Hood. It's not as simple as Occam's razor, but it could work.
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