Ethereum miners have raised around $600 million from other investors since 2020, according to a new report from the Bank for International Settlements (BIS) that focuses on widespread cryptomining misapplications.
The June 16 bulletin, “Miners as middlemen: Extractable value and market manipulation in Crypto and DeFi,” shows that the BIS has made three key takeaways on the functioning of the Ethereum protocol.
The first finding is hardly surprising: Ethereum (ETH) and the decentralized finance (DeFi) protocols built on it rely on validators or “miners” as intermediaries to verify transactions and update the ledger. The thesis of the report is how these intermediaries can abuse their duties in the form of “maximum extractable value (MEV)”:
“Because these brokers can choose which trades to add to the ledger and in what order, they can engage in actions such as front-running (knowingly preempting loaded orders) and sandwich trading (programming bots for the same trade) that are illegal in traditional markets.”
The report defines MEV as “the maximum profit miners can make from other investors by manipulating the selection and ordering of transactions to be added to the blockchain network”. The authors of the report estimate that one in 30 transactions added to the Ethereum blockchain falls into this category.
MEV, the equivalent of front-running in traditional markets, is not illegal according to the report:
“If a miner notices a large transaction in the mempool that may affect the market price, he himself can open a suitable position for the transaction before the big transaction and thus profit.”
According to the report, MEV is one of the inherent flaws of anonymous blockchain networks, so there is no simple way to get rid of it. According to the BIS, MEV threatens many new DeFi applications and this threat may become even greater in the future.