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Ethereum Blocks may be Manipulated by Miners to Exploit DeFi

Anonymous researcher Frank Topbottom suggests that some Ethereum miners appear to be re-engineering blocks in order to take advantage of DeFi opportunities in an instance of what is termed “miner extractable value,” or MEV. 

For starters – ethereum mining is a computationally intensive process that requires considerable time and processing power.  It involves ‘miners’ from around the world who use computing hardware deployed to solve cryptographic puzzles. On being successful, they are able to verify and add blocks to the Ethereum blockchain and earn a reward in return. 

Miner extractable value has long been anticipated as a potential exploit for DeFi, that leverages the unique protocol influence miners tend to have. Many researchers have pointed out that since miners have essentially full flexibility over the transactions included in the blockchain and in which order, they can gain from several exploitative techniques for on-chain decentralized finance. 

Suspicious Ethereum Transactions

Frank Topbottom has also highlighted several convincing instances of MEV in the wild, in what is likely to be the first time these activities have been noticed by the public. Additionally, Topbottom also noted several instances of suspicious transactions from major pools like SparkPool and F2Pool.

These transactions were often initiated by a small set of addresses and showed up earlier in blocks despite having a lower gas fee than other transactions after them. The purpose of these transactions remains unclear so far. A more evident case of MEV can be observed with transactions from some minor pools, with Topbottom citing 2Miners, Minerall Pool and EzilPool, which hold about 2% of total hashrate.

There is one particular transaction attracting this sort of scrutiny. Its first suspicious characteristic is that its fee is essentially zero – two Wei, to be precise. Yes, that’s right – the fee is two Wei, not Gwei (or one billion Wei).

Quick recap – the Wei is the smallest monetary Ether unit, and is equal to a billionth of a billionth of one Gwei. As anyone familiar with Ether transactions will confirm, a two Wei fee transaction will not be expected to receive confirmation at all.

Another strange observation is that the transaction is an arbitrage trade that netted its sender about $70 out of a commitment of $2,800. A trade like this is practically impossible to be profitable with the prevailing gas fees of our times. Which is why arbitratge traders have always ignored them.

Miner Collusion Likely

While it is unclear who the culprit is behind these transactions, it’s a fairly obvious guess that this has been achieved with collusion from miners. Due to the miners’ ability to reorder transactions at their will, miners can beat all others at arbitrage trades, auction liquidations and token offerings etc.

Topbottom does note, that in this particular case, the transaction contributed to making the market somewhat more efficient, by virtue of balancing out prices. But, of course, the miners’ power can also be anticipated to go far beyond that.

Preventing miners from extracting value from DeFi is extremely difficult, as these actions do not go against consensus rules. It is also worth noting that this is not unique to Ethereum proof-of-work miners. 

In Ethereum 2.0, assuming that the blockchain’s general architecture remains unchanged, stakers would have the same power. Even operators on some layer two solutions would be in a position to front-run their users.

A potential solution being studied is auctioning MEV, which would formalize this behavior and “sell” the right to reorder transactions at will.

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