A fresh report from the Bank for International Settlements comes to a radical conclusion, claiming that the public identities of intermediaries are necessary to fight “miner extractable value.”
Since 2020, miners on the Ethereum blockchain have extracted around $600 million from other investors by miners, according to a new report by the Bank for International Settlements (BIS) focusing on common malpractice in the crypto mining industry.
The June 16 bulletin, “Miners as intermediaries: extractable value and market manipulation in crypto and DeFi,” suggests three key takeaways from the BIS’ research on the functioning of the Ethereum protocol.
The first is hardly surprising, which observed that Ether (ETH) and decentralized finance (DeFi) protocols built on it “rely on validators or ‘miners’ as intermediaries to verify transactions and update the ledger.” The main thesis of the report is formulated around the abuses these intermediaries can make of their role in the form of “miner extractable value” (MEV):
“Since these intermediaries can choose which transactions they add to the ledger and in which order, they can engage in activities that would be illegal in traditional markets such as front-running and sandwich trades.”
A more precise definition in the report qualifies MEV as “the profit that miners can take from other investors by manipulating the choice and sequencing of transactions added to the blockchain.” Authors estimate that one out of 30 transactions in the Ethereum blockchain is added by miners for artificial profiteering.
According to the report, MEV resembles front-running by brokers in traditional markets but, unlike that practice, isn’t illegal itself:
“If a miner observes a large pending transaction in the mempool that will substantially move market prices, it can add a corresponding buy or sell transaction just before this large transaction, thereby profiting from the price change.”
The third key takeaway is that MEV is an intrinsic shortcoming of pseudo-anonymous blockchains, and thus there is no simple way to get rid of it. per the BIS, it poses a threat to a range of new DeFi applications and could intensify in the future, making it inevitable.
Nevertheless, the report does recommend an approach to tackle MEV in the form of permissioned distributed ledger technology based on a network of trusted intermediaries whose identities are public. This means giving up blockchain’s core value of anonymity.