What Is MEV Protection and How Does It Protect Your dApp Users
Introduction
When regular traders initiate transactions on the blockchain, they hardly wonder what happens afterward. Transactions on blockchains are facilitated in seconds, which makes asking such questions unnecessary; however, this makes transactions susceptible to unfair trading practices like Maximal Extractable Value (MEV), also known as an invisible tax.
Even advanced cryptocurrency traders risk paying this tax where necessary tools are not used to protect them. To prevent this market exploitation, several MEV protection tools have been introduced for dApp developers to integrate with decentralized applications so that users can enjoy explicit protection from MEV by service providers.
What is MEV – Maximal Extractable Value
In the blockchain network are Miners (for the Proof-of-Work consensus mechanism) and Validators (for the Proof-of-Stake consensus mechanism), who are responsible for ordering and validating transactions before adding them to the blockchain. Then, there are searchers who use flashbots to detect transactions before they are validated and reorder the transactions to extract profit from them.
Tactics like Front-running (when a searcher jumps in front to buy an asset at a low price), back-running (a searcher places an order after a user's transaction to extract profit), or sandwich (a searcher buys before a buyer offering high slippage, the buyer's order increases asset's price and the searcher resell at the new price) are used to extract MEV.
Instances of MEV in crypto trading
Loan liquidation: Decentralized loan platforms allow crypto traders to take out loans after providing collateral. However, to ensure the integrity and smooth running of the platforms, when the collateral provided by a borrower falls below the value of the asset borrowed, it becomes impertinent to liquidate it. The platform also allows anyone to liquidate the loan – that is, anyone can pay on behalf of the borrower and receive the collateral – and then impose a penalty fee on the borrower.
MEV searchers are constantly looking for loans that need to be liquidated so that they can receive the collateral and a part of the penalty paid by the borrower as a reward.
Uncle bandit attack: When two miners validate the same transaction on a blockchain simultaneously, two blocks are created for it. The blockchain then chooses which of them becomes the canonical block, usually by checking for which of the blocks is validated by most nodes, and then adds it to the blockchain. The other block created but not added to the blockchain is called an uncle or orphaned block.
An uncle bandit attack occurs because the transaction in the uncle block, though it doesn't affect the state of the blockchain, is visible to the public and searcher can leverage the transaction details to open arbitrage trades to profit from slight price differences.
NFT MEV: Aside from cryptocurrency assets, MEV also affects NFTs (Non-Fungible Tokens); that is, like in crypto trading, searchers can also manipulate NFT trading to gain profit. This can be by reordering NFT transactions to cause gas wars or buying at a lower price after peeping into transaction details.
Time-Bandit Attach: This is another way for searchers to extract MEV (specifically on PoW network) by rewriting past transactions in the past. When searchers detect profitable opportunities among past transactions, they can offer miners high incentives and get them to re-mine the block, thereby changing the record already validated on the blockchain. This type of practice undermines the trust system and integrity of blockchain.
Different MEV Protection Tools and How They Protect dApp Users
It is recommended that dApp developers build applications with MEV protection tools or techniques to ensure that users can enjoy MEV protection benefits like fair trading, reduced slippage, and trust when using applications.
Introduce low slippage tolerance: If traders set low slippage tolerance, they can defend transactions from searching who intend to use the sandwich tactic to get MEV. However, while slippage means the asset's price won't increase significantly, it may sometimes cause transaction failure.
Use MEV-Geth software: This MEV protection tool allows traders to send their transactions straight to validators instead of adding them to the memory pool. This ensures that transaction details are protected from the public.
Block MEV using RPC Endpoint: Suitable RPC can protect crypto transactions using different methods. This may include analyzing pending transactions to detect MEV or reordering transactions to send a new transaction with higher gas fee to frustrate searchers. RPC can also block MEV by hiding transactions from public access routing transactions directly to the blockchain, eliminating the need to add them to the mempool.
Conclusion
MEV not only exploits traders' transactions for profit but also compromises blockchain security. Growth in bad actors who use MEV to manipulate trades has cost traders over $1.4B, showing the need for efficient MEV protection tools and measures. Developing applications on infrastructures, like Chainnodes RPC and blockchian nodes, where RPC endpoints are used to ensure MEV protection is a prerequisite for creating a secure and user-oriented environment. Chainnodes is a leading RPC service provider offering dApp developers efficient web3 RPC and node services, ensuring that building and deploying secure and scalable applications on L1 & L2 blockchains is possible.