Maximum Extractable Value (MEV) is a complex concept whose effects affect all DeFi users.
MEV represents the maximum value that blockchain validators or miners can extract by rearranging the order of transactions in a block before it is validated, with the aim of maximising their profits.
To better understand, let's take a simple example: imagine yourself in a queue to buy a very popular concert ticket. You finally reach the ticket office, but suddenly someone arrives, pays the ticket agent to go ahead of you and buys the last ticket. In this example, the ticket clerk is acting as a miner or validator on the blockchain, able to reorder transactions for extra profit.
In the cryptocurrency world, this situation occurs when validators change the order of transactions to seize profit opportunities, such as buying a low-priced asset before you to sell it for more. This practice can lead to higher fees and affect users, as their transaction is "overtaken" or manipulated to maximise the miner's gains.
In DeFi, this process can impact users by sometimes generating higher fees or unexpected price variations (slippage). Although MEV offers additional income to validators, it raises questions about the fairness and decentralisation of blockchains.
For more details on how it works, its value chain and the issues involved, see our other article dedicated to this subject.
In this article, we present various solutions for minimising losses associated with MEV, whether for carrying out swaps or providing liquidity. We will focus on the projects available on Ethereum, the blockchain where MEV activity is highest, particularly due to its high block time (12 seconds), and where the main solutions are being developed.
CoW Swap CoW Swap is a protocol based on "intents", a type of transaction where the user expresses their objective, and then sophisticated actors called "solvers" compete to achieve that objective in the most optimal way possible. For example, in the case of CoW Swap, an intent might be "I want to trade X ETH for at least Y DAI".
The intents of CoW Swap users are sent to a private mempool, accessible only to a limited number of trusted solvers. This contrasts with the public mempool, where anyone can see the transactions in progress and try to profit from them.
This operation also makes it possible to draw on sources of liquidity that are not limited to the DEX pools. In fact, CoW Swap uses a grouped auction system enabling solvers to connect peer-to-peer transactions within a lot. This is known as Coincidence of Wants (CoW).
To simplify, if within a lot one user wants to sell ETH against DAI and another wants to sell DAI against ETH, the two orders will be connected by a solver who will eventually top up using other sources of liquidity. Peer-to-peer transactions are less expensive in gas and are not subject to MEV as they are simple payments between two users.
Furthermore, each lot has a uniform settlement price, meaning that all orders within a lot are executed at the same price by the solver who won the auction. There is therefore no incentive to change the order of these transactions, which eliminates opportunities for MEV between them.
The main disadvantage of batch auctions is their relative slowness compared with other swap methods. This is because it is necessary to aggregate multiple orders into a batch before they can be executed.
The chart below highlights that the CoW Swap interface and its various integrations now handle the largest volume of transactions on Ethereum.
Source : Orderflow.art CoW AMM While CoW Swap is probably the best solution for minimising MEV in swaps, MEV continues to affect liquidity providers, particularly through the "loss-versus-rebalance" (LVR) phenomenon.
For more details on how it works, its value chain and the issues involved, see our other article dedicated to this subject.
CoW AMM makes it possible to create liquidity pools that minimise LVR.
In contrast to traditional pools that can be arbitrated in real time, those based on CoW AMM organise auctions between solvers wishing to arbitrate the pool. They then accept the most profitable arbitrage opportunity for the liquidity providers.
Arrakis Arrakis has used Valantis, a protocol similar to Uniswap V4 for creating custom liquidity pools, to develop an AMM called HOT ("Hybrid Order Type").
HOT can execute two types of orders: normal swaps and flash swaps. Flash swaps make it possible to guarantee an execution price for solvers wishing to rebalance pool liquidity and provide liquidity to realise, for example, a swap intent issued on CoW Swap.
HOT offers a fixed price for its flash swaps, determined by an off-chain system operated by Arrakis that is based on other on-chain price sources.
The aim is to provide competitive pricing against proactive market makers, such as Wintermute, which provide much of the liquidity for intent-based swaps.
HOT therefore aims to capture a greater amount of trade flow in order to offer better returns to its liquidity providers.
Conclusion DeFi suffers from the high latency of blockchains, which must form a consensus to move from one state to another. This situation creates arbitrage opportunities, seized by sophisticated players, often to the detriment of other participants.
The use of intents makes it possible to maintain on-chain constraints (initiation and resolution) while relying on off-chain players to offer the best results.
Intents have greatly improved the quality of swap execution. However, their implementation within AMMs is still fairly recent and will need to prove its effectiveness.
Minimising LVR can be useful, but liquidity providers within AMMs face other challenges, notably impermanent loss, which arises when the prices of assets in a pool diverge.
AMMs are an industry in constant evolution. Innovative new solutions, such as application-specific sequencing developed by Sorella Labs, continue to emerge with the aim of improving the profitability of on-chain liquidity providers.
