While Ethereum has just got one of the biggest upgrades of the year, the community was hit hard with the recent negative news. An unknown attacker caused a loss of $25 million to MEV bots.

This has started several debates connected to the future of MEV and its current state, especially in the Ethereum ecosystem. How did this happen and what are the implications of the current MEV attack incident?

What is Maximal Extractable Value (MEV)?

MEV used to stand for “Miner Extractable Value,” but recently the term “Maximal Extractable Value” has been used much more. MEV refers to the amount of profit that can be extracted by miners or validators on a blockchain network by reordering, censoring, or inserting transactions into a block before it is mined.

In simpler terms, MEV is the amount of money that miners or validators can make by taking advantage of the order in which transactions are processed on a blockchain network. By doing this, they can potentially make more money than they would by simply mining blocks and collecting transaction fees.

For example, if a miner or validator is able to detect a pending transaction that will cause a significant change in the price of a cryptocurrency, they can prioritise that transaction in the block they are about to mine in order to profit from the price movement. Or, if they are able to censor a transaction that competes with their own transaction, they can ensure that their own transaction is included in the block and collect more fees.

MEV has become an increasingly important concept in the cryptocurrency industry as it can have a significant impact on the profitability of mining and validation operations. It also raises concerns about fairness and security on blockchain networks, as MEV extraction strategies can potentially be used to manipulate the market or compromise the integrity of the network.

Ethereum is one of the cryptocurrency projects where MEV is becoming increasingly more dominant and important. That is one of the reasons why the recent incident has shocked the Ethereum community and has led to countless debates on various topics connected to  MEV. What happened?

What happened during the recent MEV attack?

On April 3rd, 2023, the Ethereum ecosystem was rocked by a sophisticated attack that targeted MEV bots. According to reports, the attack caused a loss of over $25 million for the affected bots. This attack has raised concerns about the vulnerability of the MEV ecosystem and the potential risks associated with it.

The attack targeted a specific MEV bot that was reportedly exploiting a vulnerability in the Ethereum network to extract maximum value. The bot, which was operated by an anonymous user, was making significant profits by front-running transactions that were in the process of being confirmed on the network. However, the profits of this bot attracted the attention of a validator who decided to take action.

MEV attack in-depth

According to some, the MEV bots were attempting to execute a trade on a decentralized exchange using a “sandwich” technique, in which they would insert their own trades before and after a large trade to profit from the price movement. However, the rogue validator was able to detect the bots’ activity and inserted their own transaction ahead of the bots, effectively “front-running” them and causing their trades to fail.

Simplified illustration of the MEV attack, Source: BlockSec

As the research analysts of Blockworks suggested, the attacker became an Ethereum validator about 18 days prior to the attack by paying the 32 ETH staking minimum to become a validator. After that, it seems that the rogue validator has been waiting for the chance to propose a block and carry out its attack. Once given a chance, the validator included additional transactions to its proposed block. This enabled the validator to front-run MEV bots and take advantage of their vulnerabilities.

Preparation of the validator for the attack, Source: Twitter.com

In an analysis of the incident, security firm CertiK identified the attacker as a group known as “OxBad” and noted that they had used several advanced techniques to carry out the attack besides “front-running”, including “validator collusion” and “block withholding.” They also noted that the attack was not the first of its kind and that similar incidents had been reported on other blockchain networks.

Flash loans as a key to the attack

Moreover, the validator, whose identity remains unknown, also carried out a sophisticated attack that involved using a flash loan to manipulate the transactions being confirmed by the bot. Flash loans are a type of loan that allows users to borrow funds from a lending protocol without any collateral or credit check, as long as the loan is repaid within a single transaction.

In simpler terms, flash loans are a way for users to borrow money quickly and easily, without needing to put up any assets as collateral or go through a credit check process. They can be useful for users who need access to large amounts of capital quickly, such as traders looking to take advantage of arbitrage opportunities or developers looking to fund new projects.

Flash loans have become popular in the cryptocurrency industry due to their speed and flexibility, but they also raise concerns about security and stability. Because they do not require collateral or credit checks, they can potentially be used for fraudulent or malicious purposes, such as manipulating the price of a cryptocurrency or attacking a decentralized finance protocol. In this case, they allowed the attacker to exploit the MEV bots.

Loss of $25 million spread across several bots

This manipulation caused the bot to lose all of its funds, resulting in a loss of over $20 million. The attacker reportedly took the remaining $5 million from other bots that were also engaged in MEV extraction.

The biggest chunk of the money was stolen through Wrapped ETH (WETH) with more than $13.5 million USD worth being stolen, followed by $5.2 million in USDC, and $3 million in Tether. The remaining sum was stolen via Wrapped BTC (WBTC) in the dollar amount of around $1.8 million and $1.7 million in Dai (DAI). According to on-chain analytics, these sums were transferred to three different wallets for consolidation.

Chart of the drainage of different coins and tokens during the attack. Source: PeckShield

The attack has raised questions about the security of the Ethereum network, particularly in the context of the MEV ecosystem. While this concept has been around for some time, it has recently gained prominence due to the rise of DeFi (Decentralized Finance) applications on the Ethereum network.

MEV attack and its implications

MEV has become an important source of revenue for many individuals and organisations operating on the Ethereum network. However, as this attack has demonstrated, MEV is not without its risks. The attack has highlighted the need for improved security measures to protect the ecosystem from similar incidents in the future, but also lead to debates around ethics of MEV, its transparency and connection to the broader cryptocurrency market as well as the possibility of regulation.

Another issue that came out of this attack is connected to the centralization of validators and the whole Ethereum ecosystem. As per CertiK team, the vulnerabilities of validators can be reduced if the whole network becomes more decentralized. 

The attack has led to a debate about the ethics of MEV extraction as well. While some argue that it is a legitimate way to earn profits on the network, others argue that it is a form of rent-seeking that ultimately harms the integrity of the network. It has added fuel to this debate and may lead to further discussion about the role of MEV in the Ethereum ecosystem.

The attack has not only affected the bots that were targeted, but also the broader Ethereum ecosystem. The incident has caused a significant drop in the value of Ether (ETH), the native cryptocurrency of the Ethereum network. This drop has raised concerns about the impact of MEV on the broader cryptocurrency market, particularly in light of the growing popularity of DeFi applications.

This incident has also highlighted the need for greater transparency in the MEV ecosystem. Currently, MEV extraction is largely controlled by a small group of individuals and organisations who are able to exploit the vulnerabilities in the network to extract maximum value. This lack of transparency has made it difficult for regulators and other stakeholders to fully understand the risks associated with MEV extraction.

In response to the attack, some members of the Ethereum community have called for greater regulation of the MEV ecosystem. They argue that this will help to protect the network from similar incidents in the future and ensure that MEV extraction is carried out in a fair and transparent manner.

Conclusion

Overall, the recent attack on the MEV bots has raised important questions about the security, ethics or transparency of the Ethereum network. While MEV extraction has become an important source of revenue for many individuals and organisations operating on the network, this incident has demonstrated that it is not without its risks.

As the Ethereum ecosystem continues to evolve, it will be important for stakeholders to work together to develop new security measures and regulatory frameworks that can help to ensure the long-term stability and sustainability of the network.

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