A blockchain is a completely decentralized system where there is no central authority to authenticate or verify any transaction. Finance is such a critical thing that still for each transaction, verification is mandatorily required. For validating a transaction on blockchains, few nodes within the network only participate and validate the transactions. The whole process depicting a complete transaction is shown in figure 1. The nodes which authenticate transactions are often called ‘miners’ or ‘validators’. The basic task of miners is maintenance of the ledger in the blockchain. For performing the task of transaction validation, they profit in two ways i. Block rewards and ii. Transaction fees. Primarily, these gains act as an incentive for the miner for performing the task of mining in the blockchains.
Meanwhile, we know that in blockchains even a slight difference in time of transaction can result in huge value difference of coins and of assets too. In blockchains, the exchanges and transfers are in the form of digital currency where on spot verification of the transaction is not possible unlike physical currency. Before updating the transaction details to the blockchain ledger, miners need to verify them which introduces latency in transaction validation. In the digital world arbitrage in transactions has a much higher probability than in the physical world.
Concurrently, we also know that mining is the core mechanism for acceptance of a transaction. The power of accessing the ultra confidential resource of the blockchain i.e. the ledger is in the hands of blockchain miners. This whole process of adding a transaction (as shown in figure 1) in the blockchain is called ‘proof of work’. This all makes miners have a predominant control over what is there on the blockchain ledger and subsequently on the blocks of the blockchains. And the pitfalls of the blockchain as stated in the above paragraph can be utilized by a selfish or malicious miner.
Threat Posed by Miners : Giving such powers in the hands of miners induces the act of transaction manipulation in the ledger by the miners. At times, miners can become selfish and can alter (re-order, double-spend, include, exclude) the transactions to gain profit. This total value gained by miners is termed as Miner Extractor Value (MEV). There are multiple miners in a blockchain system and mining requires very huge computation powers which a normal node cannot afford, so there should not be such forgeries but the irony is now-a-days the crypto system is facing lots of attacks leading to surplus gain to the miners. A recent study found that miners through arbitrations and liquidations gained an amount of 0.34 ETH per transaction in a period of six months only. This study shed light on the fact that the secure cryptosystem has potential threat from the methodology of ‘proof of work’ used for mining the transactions. Blockchains, previously were known to struggle with trimella of speed, decentralization and security has a new member now leading to quadrilemma of speed, decentralization, security and MEV. Next we will explore a few common types of attacks that can result in superfluous gain to the miners by MEV.
In the blockchain system there have been a few common attacks related to MEV such as 51% attack, undercutting attacks. Recently, newer attacks have been discovered such as time-bandit attacks. Explanations of these attacks are hereby inlined.
51% Attack (Majority Attack) : The job of mining is accomplished by miners using computers with high computations powers. The verification involves huge mathematical calculations, time, computer backing electricity, etc. in order to verify a transaction. So, the story of mining goes like if you have more computation power, more transactions you can mine. The 51% attack is a scenario where a miners or group of miners can acquire 51% of resources. This subsequently will empower them with most of the transaction mining tasks.
It appears that gaining 51% of computing power is a very costly task which should be nearly impossible. But its not true, a real 51% attack did occur in the year of 2018 on 26th largest cryptocurrency Bitcoin gold. Though gaining 51% of computing power is way more difficult but still if it’s not 51%, it can be lesser. Such attacks are referred to as Majority attacks in a broader sense, once the majority is 51%, it is called as 51% attack. But any amount of gain over computing resources can transfer the right to validate a transaction to a single/group of miners. Here the computing power is the key role player behind such types of attacks. There are other attacks which occur due to the computing power allocation like Bitcoin withholding attack, Goldfinger attack. For such attacks the whole sole gain of MEV is to the attacker.
Undercutting Attacks :
The rational mining strategy goes like validating a transaction and adding it to the longest chain.
While in an undercutting attack, the malicious miner forks the transaction which has higher associated block rewards. The cryptosystems offering block rewards are more vulnerable to such attacks. An example of such an attack is shown in figure 2 where option one is a rational behaviour while option 2 is a malicious behavior. This delivers extra MEV to the undercutter miner.
Time-bandit attacks : In cryptocurrencies, there can be a sudden hike in the coin values within a very small amount of time. Miners have power to re-order or rewrite the transactions. For example, the price of a token suddenly increased from 1 USD to 2 USD in 24-hours. Now, all the transactions that settled on 1 USD token price, if were done on 2 USD token price; there have been almost double flow of finance. Taking advantage of such situations, a miner can rewind the transactions when the value of the token has increased and can gain significant MEV in return.
The blockchains are already facing challenges of scalability, security and many more. The threats brought because of MEV has added a new challenge. The worst part is there is no upper limit of the gain on MEV, it can be very huge and can also be proportional to the ever increasing value of digital assets.
This challenge has emerged recently and since this is a very critical financial system, many solutions to this challenge have also emerged. A few solutions are use of proof of stake, MEV auction, MEV-Geth and many more are on the way.