BIS report calls practice used by ETH miners as illegal
3 min read
A new report published by the Bank for International Settlements (BIS) has looked into mining on the Ethereum network.
In this case, the BIS addressed the MEV in ETH mining, comparing it to illegal activities in traditional markets. Maximal extractable value (MEV) refers to the maximum value that can be extracted from block production in excess of the standard block reward and gas fees by including, excluding, and changing the order of transactions in a block.
BIS about MEV
MEV refers to the profits miners can earn by choosing which transactions to include in a block and in which order.
According to the report, they make their profits through “market price manipulation”. This happens, according to text, “through a specific order of pending transactions.”
Meanwhile, in the traditional financial market, transactions are processed in the order they are received, the BIS said.
However, in the case of blockchains, miners determine which transactions to add to a block. That is, they are free to choose from all outstanding transactions in the memory pool or mempool.
That way, they can opt for transactions based on the amount of transaction fees. In this system, transactions with the highest fees are added up first, as you would expect.
But they can also select transactions based on the “profit opportunities they generate”. And thus process the most profitable transactions first.
For example, a miner can introduce their own transaction before a large pending transaction that could affect prices, thus making a profit, the report explains.
“If miners see a large pending transaction that could affect the asset price, they can choose to add their own transaction. This will allow the miner to make a profit. This is because he has prior information on how this will affect prices, thanks to the pending transaction in the mempool”, highlights the BIS.
In this sense, the BIS states that this profit occurs as if it were a negotiation with privileged information.
“This profit not only comes at the expense of other market participants, but the miner’s transactions also delay other legitimate transactions. Thus, it forms an ‘invisible tax’ on the participants”.
Likewise, miners can also engage in “back-running”, says the BIS. This means that a miner can place a buy or sell order immediately after a large transaction, or a market movement event.
The report estimates that the MEV has totaled around $550 to $650 million since 2020 on Ethereum blockchain alone.
In addition, the report highlights that this share was even higher in early June 2022.
“This is due to several large MEV transactions made during the recent market stress,” he said.
According to the BIS, regulators around the world need to rule this MEV as illegal. After all, this also occurs in the traditional market.
“MEV also poses a problem for the industry itself, as it is at odds with the idea of decentralization.”
In the future, the MEV will likely increase and miners who engage in the MEV will have more profits and can drive out other miners.
“MEV constitutes an existential risk to the integrity of the ETH blockchain.”
