MEV on Ethereum: A Policy Analysis

Abstract

In cryptocurrency markets, maximal extractable value (“MEV”) is typically defined as “excess profit that a miner [validator] can extract by adjusting execution of user transactions.” MEV extraction has slowly been gaining broader recognition, e.g., from the Bank of International Settlements, the International Organization of Securities Commissions (“IOSCO”), and mainstream publications like Forbes. The Bank of International Settlements estimates that there has been between $550 and $650 million of total MEV volume since 2020.

The aim of this paper is to provide an overview for policymakers regarding what we know today about MEV, but perhaps even more importantly, how much we do not know. I will offer general critical analysis of policy questions raised by MEV extraction on the Ethereum blockchain. The paper is intended both for those unfamiliar with MEV and those who are broadly familiar.

I consider whether MEV extraction poses a problem that merits public-policy intervention. I argue that the mere fact that MEV extraction may adversely affect some market participants is not sufficient to answer that question. As in stock trading, which may likewise appear to be a zero-sum game with a “winner” and “loser” in each transaction, the nature and effects of MEV extraction have more dimensions that need to be considered.

It is important to carefully consider the costs and benefits of regulatory responses to MEV extraction. Moreover, regulation and regulatory enforcement in the realm of public blockchains faces the problem of regulatory arbitrage. Operators may choose the most favorable jurisdictions, while retaining influence on markets in other jurisdictions. This provides a strong argument to prefer and support technical solutions that would apply globally over national or even international legal rules.

Keywords: cryptocurrencies, blockchains, market manipulation, financial regulation, law and economics, MEV