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Systematization of knowledge: the advent of a new incentive, maximal extractable value

In: The Elgar Companion to Decentralized Finance, Digital Assets, and Blockchain Technologies

Author

Listed:
  • Burak Öz
  • Felix Hoops

Abstract

In public, permissionless blockchains, incentives play an essential role in the evolution of a network. Without sufficient incentives, people will not be interested in contributing to a network. Misalignment of incentives is dangerous as well. Given sufficient alternative incentives, network participants can attempt attacks that affect consensus stability. This could go as far as centralizing the entire network around a small set of vertically integrated actors. Until the explosion in decentralized finance protocols in the summer of 2020, the main incentives on Ethereum were the block reward and the transaction fees. That summer, it became clear that there is an extra value on top of these incentives, which protocol members like miners can permissionlessly extract by reordering, censoring, and including transactions in a block. In this chapter, we introduce the advent of this new incentive, known as Maximal Extractable Value (MEV), and discuss its impact on Ethereum.

Suggested Citation

  • Burak Öz & Felix Hoops, 2024. "Systematization of knowledge: the advent of a new incentive, maximal extractable value," Chapters, in: Henrik Cronqvist & Desiree-Jessica Pely (ed.), The Elgar Companion to Decentralized Finance, Digital Assets, and Blockchain Technologies, chapter 12, pages 241-264, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:22115_12
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    File URL: https://www.elgaronline.com/doi/10.4337/9781035307760.00017
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