The statement is based on a report that provides a theoretical and legal framework to guide other regulators.
The International Organization of Securities Commissions (IOSCO), a global authority on securities regulation, has designated the MEV as “unlawful.” Such practice, IOSCO assures, is common in any DeFi product or service and although it works as an economic incentive, it is also a crop for dishonest practices.
Maximum Extractable Value (MEV), formerly known as Mining Extractable Value, refers to the strategy of including, omitting or reordering transactions when creating a new block. The goal of MEV is to obtain the maximum possible profits. Block producers are best positioned to do this as they have the ability to select and order transactions. Validators or miners can, through this mechanism, include, exclude and order transactions to maximize the profits obtained in each block.
IOSCO Claims that the Use of MEV in DeFi is “Unlawful”
According to IOSCO, “the ability to reorder, insert and otherwise control transactions enables conduct that in traditional markets would be considered manipulative and unlawful.” Such activity can result in transactions failing to achieve execution on the terms expected. Such activity could take the form of typical MEV exploits, the most common involving “front-running,” “back-running,” and “sandwich attacks”, which are briefly explained below.
Front-running occurs when a participant tries to execute their own transaction before a pending mempool transaction to realize a profit. This can happen when a miner/validator re-orders transactions on a proposed block, tries to pay a higher gas fee or colludes with a miner/validator to move their transaction ahead of the pending transaction.
Back-running occurs when a participant seeks to have their transaction executed immediately after a pending transaction.
A sandwich attack happens when a participant places two transactions around, one immediately before and another right after, a pending transaction.
Although MEV serves as an economic incentive for validators, as blockchain adoption increases, its duality with traditional markets increases. Therefore, it is a matter of time before a series of securities and international trade regulators take action on the matter.
These incentives create possibilities and secure the network, increasing the profits of validators. However, it generates market vulnerabilities and inefficiency when processing transactions.
Based in Madrid, the global securities regulator criticizes the MEV and suggests that the correct path would be to ensure that those companies offering DeFi services or products do not have hidden interests, placing specific emphasis on the MEV.
The organization also argued that DeFi services and products could function correctly and even reduce the risks and collateral damage of the MEV due to the way in which traditional markets operate. This refers to an implementation or regulatory duality for the future.
Ethereum: Case Study
One of the most prominent examples is Ethereum, whose accumulated MEV value after the last major update increased by 19,000%. This reaches approximately a value of 300,000 Ethers. Although the figures in money before The Merger were higher, according to a Flashbots panel, during the last year they have accumulated around $490 million at the current price.
The report issued by the organization clearly points to market manipulation, a concern for traditional organizations. A similarly illuminating report was issued in May, openly pointing at the same problem.
Regarding the MEV, IOSCO suggested that companies address and collaborate to overcome operational risks and at the same time, offer clear information to users about the services offered.
By Audy Castaneda
