Miners as intermediaries: extractable value and market manipulation in crypto and DeFi

Key takeaways

• Cryptocurrencies such as Ethereum and decentralised finance (DeFi) protocols built on them rely on validators or "miners" as intermediaries to verify transactions and update the ledger.
• Since these intermediaries can choose which transactions they add to the ledger and in which order, they can engage in activities that would be illegal in traditional markets such as front-running and sandwich trades. The resulting profit is termed "miner extractable value" (MEV).
• MEV is an intrinsic shortcoming of pseudo-anonymous blockchains. Addressing this form of market manipulation may call for new regulatory approaches to this new class of intermediaries.