On Ethereum, transaction sequencing can create profits for searchers and affect what decentralized finance users receive, as some strategies align market prices while others worsen a swap.
MEV is value that can be captured through choices about which transactions a block accepts or leaves out and how accepted trades are sequenced; it is an outcome of block production, not a token. Ethereum adopted proof-of-stake consensus in The Merge on Sept. 15, 2022. The work involves validators proposing blocks, builders packaging and sequencing transactions, relays carrying builders' proposals to validators, and searchers scanning for profit opportunities.
When an asset trades at different prices, arbitrageurs may buy in the lower-priced market and sell in the higher-priced one, drawing prices closer. In decentralized finance lending, searchers compete to liquidate loans that qualify under a protocol's rules; the one that completes the liquidation first may collect a fee. Faster liquidations can come with higher transaction costs as searchers compete.
Searchers can target an order while it waits in Ethereum's public mempool, where pending transactions are visible. In a sandwich sequence, a searcher may trade before a user's swap to move the pool price, then make another trade after the swap executes; the sequence can leave the user with fewer tokens. An unfavorable fill alone does not prove a sandwich occurred, since trade size, limited liquidity and market moves can also affect execution.
Before signing, users can review the minimum output their swap will accept, the interface's price-impact estimate and the pool's available liquidity. The price-impact estimate indicates how much an order may move the pool price, while slippage is the difference between the quoted and completed swap price. A slippage limit sets how far execution can depart from the quote before the transaction fails: a narrow limit can stop it from completing, while a wider one may allow a worse rate.
Private submission may keep a pending swap out of the public mempool and reduce its visibility, but it does not remove all MEV risk. Users depend on the builders receiving the transaction to keep its details private and avoid trading ahead of it.
Flashbots' tools work at separate points in the process. Protect uses private routing to reduce a transaction's public exposure; MEV-Share lets users choose which details to reveal to searchers seeking trades after it, with a default 90% share for users from eligible MEV generated by a transaction. That percentage applies to eligible MEV, not the swap's value, and does not guarantee a payout; MEV-Boost lets validators access builders while a block is assembled.
