MEV is a hidden tax imposed on users of a blockchain by miners, validators, and sequencers.
We made a video + ๐งต that explains the concept.
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You can watch the full video on YouTube.
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MEV stands for Miner-Extractable Value or Maximal Extractable Value.
Simply put, MEV is the total value that miners extract from a blockchain networkโs users by selectively reordering, inserting, and censoring transactions within blocks produced on the network.
How do miners and validators extract this value?
Pending transactions from users go to a pool called the 'Mempool' where a 'Miner' comes in and chooses a few transactions from the Mempool to organize into a block.
Since each block has limited space & can only contain a limited number of txs, miners are responsible for selecting, organizing, and aggregating network transactions into blocks.
They ultimately decide which pending transactions from the mempool are added to produced blocks.
As you might expect, miners and other key players, such as validators and sequencers when it comes to Proof-of-Stake protocols, typically prioritize the transactions which have the highest value and gas fees, so they can get the highest profits possible.
Here's an analogy from the finance world to explain this better ๐
Suppose an investor or trader asks a broker to purchase 100,000 shares of Apple stock.
Now, the broker knows that a trade of this size will push the price of the share higher.
So before buying the shares for his client, the broker instead buys 10,000 shares for himself first.
After all, heโs in control of placing the orders, so itโs his choice in which order he decides to execute them.
Now, once the broker has first bought for himself, he can execute the large order on behalf of his client.
Then, once the price of the stock goes up, the broker sells his own shares to make a profit!
This is similar in concept to how MEV allows miners to profit when they are allowed to reorder, insert, and censor transactions within the blocks being produced.
Check out the full video to understand this in more detail, and learn about the different types of MEV.
The content for this video ๐งต was written by @TheoDelarosa_.
I recommend following him - he publishes an excellent weekly newsletter called The Crypto Grimoire covering everything going on in Crypto - it's SUPER comprehensive.
twitter.com/TheoDelarosa_/status/1568307763834667008
Also check out @ShivanshuMadan, whose threads about MEV inspired this writing - he's great at making complex topics simple to understand.
twitter.com/ShivanshuMadan/status/1549510560974131200
Our next video will be about the story of the Silk Road.
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