MEV’s and The Dilemmas They Pose. Is There a Way Out?

For quite some time now, Miner Extractable Value (MEV) has remained extremely contentious within the blockchain arena, especially DeFi. Originally referring to the value miners could extract by manipulating transaction order in proof-of-work (PoW) systems, the concept has since evolved with the Ethereum network transitioning to a proof-of-stake (PoS) framework — where it’s now referred to as Maximal Extractable Value.

MEV arises from the unique position validators hold in blockchain networks, i.e. they have the power to determine the final order of transactions within a block, which opens up opportunities for profit beyond standard block rewards and transaction fees. 

This can include strategies like front-running, sandwich attacks, and arbitrage across decentralized exchanges (DEXs). As a result, the European Union’s Securities and Markets Authority (ESMA), one of three regulatory bodies governing the region’s financial landscape, recently labelled the practice of MEV as ‘market abuse.’

A look at the good and the bad

On the one hand, MEV can be viewed as a mechanism that bolsters market efficiency since it incentivizes participants to identify and correct price discrepancies across various platforms — potentially leading to more stable and accurate asset pricing. Not only that, it also provides an extra layer of incentive for validators to maintain network security.

However, on the flip side, the practice routinely leads to higher transaction costs for users, as validators prioritize transactions that offer the highest MEV opportunities. This increases the overall cost of using blockchain networks and can result in transaction delays for regular users whose transactions are deemed less profitable.

That said, perhaps the most alarming aspect of MEV is its potential to drive centralization within networks. As MEV extraction becomes more sophisticated, it requires advanced analytical capabilities and powerful computing resources. This creates a scenario where larger, better-equipped validators can consistently outperform smaller ones, leading to a concentration of power and rewards. 

Therefore, as crypto users continue to grapple with these challenges, innovative solutions have emerged to alleviate these bottlenecks. ‘Express Relay’ — a service launched by Pyth Network, an oracle solution that provides real-time market data.

To elaborate, the Express Relay module connects leading trading firms directly to different DeFi protocols via a decentralized system. The key differentiator lies in its use of protocol-controlled auctions for valuable transactions, such as liquidations. — which eliminates the extractive role of miners or validators from the MEV process.

Moreover, by enabling DeFi protocols to auction off priority for critical operations, Express Relay ensures that searchers (i.e. specialized actors who identify and exploit MEV opportunities) can compete more aggressively over transaction values. 

This competition occurs in a separate auction that is not controlled by miners. It effectively removing their ability to extract value from transaction ordering.

Benefits galore

The potential benefits of Express Relay extend to various DeFi participants. Protocols, for example, can significantly reduce costs associated with operations like liquidations. Its allowing them to redirect savings towards more productive initiatives or pass them on to users.

Similarly, for searchers, it aggregates liquidation and other valuable transaction opportunities from multiple protocols in one place. It reduces the time and costs associated with negotiating and integrating with individual protocols and allows them to operate more efficiently. 

Early-stage DeFi projects can also benefit from Express Relay’s pre-integrated network of top searchers. It can dramatically accelerate deployment by eliminating the need to build a liquidator network from scratch. 

Lastly, end-users of various DeFi systems stand to gain from the elimination of unnecessary costs. It increased efficiency, which can translate to better rates and services for them.

A more efficient DeFi landscape in the offing?

As the crypto economy continues to evolve and grow. There is a pressing need for solutions that can help alleviate the pressures induced by MEV. Especially those that can align the interests of protocols, searchers, and users in a holistic fashion. 

In this regard, services like Pyth’s Express Relay serve as important technological yardsticks. It demonstrates that with innovative thinking and technological advancement, even seemingly intractable issues like MEV can be addressed efficiently. 

Therefore, as these solutions mature and gain wider adoption. It is not unreasonable to expect a future where the DeFi landscape is not only more robust and efficient. Moreover, in line with its original vision of being a decentralized, equitable financial playground for everyone.