Specifically, they point to an inherent feature of pseudo-anonymous blockchains, which involves miners validating transactions and updating the shared ledger.
“[E]Each of the validators or ‘miners’ that update the blockchain can determine which transactions are executed and when, which affects market prices and opens the door to early execution and other forms of market manipulation. report.
The profit generated by leveraging transaction sequencing is known as “miner extractable value” (MEV), he said, noting that, since 2020, the total MEV has risen to an estimated US$550 million to US$650 million alone. on the Ethereum network.
“These estimates are based on only the largest protocols and are therefore likely to be underestimates,” he said.
In fact, “MEV is so ubiquitous that miners sometimes add one in 30 transactions for this purpose,” the newspaper said.
And in early June this year, “this turnout was even higher,” the newspaper noted, “due to a series of particularly large MEV transactions during recent market stress.”
Since this type of trading would generally be considered off-limits in traditional financial markets, which impose best execution obligations and other conduct requirements on market players, the document said regulators should also examine this type of activity in markets. crypto markets.
“Regulatory bodies around the world must establish whether the extraction of value by miners constitutes an illegal activity,” the newspaper said. “In most jurisdictions, activities such as forward play are considered illegal.”
However, the application of traditional business regulation to crypto markets is ambiguous, he noted.
“While developers and miners may claim decentralization to protect themselves from legal liability, it has been argued that regulators should not accept these claims uncritically,” the newspaper said.
That said, he also admitted that the anonymity of blockchain participants could make it difficult to enforce regulatory action.
Additionally, MEV may pose an existential threat to the crypto industry itself, the paper suggested.
“Looking ahead, MEV could intensify,” he said. “[M]Iners may be forced to participate in MEV to survive. Miners who engage in MEV will on average make higher profits and buy more computing power and thus could eventually displace miners who don’t.”
As a result, “a form of rat race develops from the combination of the competitive and decentralized nature of the upgrade and the fact that each miner can assemble their block in any way they want,” the newspaper said, adding that this amounts to “a fundamental factor”. shortcoming of blockchain-based activities.”