According to a new analysis by the Bank for International Settlements (BIS) concentrating on frequent wrongdoing in the crypto mining sector, miners on the Ethereum blockchain have taken about $600 million from other investors since 2020.
“Miners as intermediaries: extractable value and market manipulation in crypto and DeFi,” a BIS bulletin published on June 16, recommends three important lessons from the BIS’ research on the Ethereum protocol’s operation.
The first is unsurprising, given that Ether (ETH) and decentralized finance (DeFi) protocols based on it “rely on validators or miners as middlemen to verify transactions and update the ledger,” according to the report.
The report’s core argument revolves around the potential for these intermediaries to abuse their position in the form of “miner extractable value” (MEV):
“Since these intermediaries can choose which transactions they add to the ledger and in which order, they can engage in activities that would be illegal in traditional markets such as front-running and sandwich trades.”
MEV is defined as “the profit that miners can steal from other investors by manipulating the choice and sequencing of transactions added to the blockchain,” according to a more detailed explanation in the paper. Miners are estimated to add one out of every 30 transactions in the Ethereum blockchain for artificial profiteering, according to the authors.
MEV, according to the research, is similar to front-running by brokers in traditional markets, although it is not illegal:
“If a miner observes a large pending transaction in the mempool that will substantially move market prices, it can add a corresponding buy or sell transaction just before this large transaction, thereby profiting from the price change.”
The third crucial takeaway is that MEV is an inherent flaw with pseudo-anonymous blockchains, and there is no easy solution to eliminate it.
According to the BIS, it poses a threat to a variety of innovative DeFi applications and is likely to become more prevalent in the future, making it unavoidable.
Nonetheless, the paper suggests using permissioned distributed ledger technology, which is based on a network of trusted intermediaries whose identities are made public, to combat MEV. This entails giving up the anonymity that is at the heart of the blockchain.
