What is a MEV Bot?

Key Takeaways

• MEV bots are programs that analyze pending transactions in the mempool, spotting price fluctuations before they happen and making a profit from them.
• Once a target has been identified, these bots manipulating the order of transactions in a block, and insert new orders to siphon value to themselves.
• MEV bots use gas fee optimization to ensure their transactions are positioned correctly in the block to snipe profits from other traders.
• While miners traditionally had exclusive access to mempool data, anyone can now deploy a MEV bot to spot and execute profitable trades within unpublished transactions.

Crypto arbitrage is a popular trading strategy in which traders look for price discrepancies between different platforms to make a profit. But did you know that you don’t always need to wait for arbitrage opportunities to arise – you can actively create them? This is where MEV bots (Maximal Extractable Value) come into play.

In this article, we’ll explore the fascinating, but controversial topic of MEV bots, explaining how they work, and the impact they have on crypto trading.

What Is a МEV Bot (MEV Arbitrage Bot)?

MEV bots – sometimes known as MEV searchers – are programs that monitor data in the mempool, finding opportunities to make a profit by manipulating how pending transactions are inserted into blocks. Their objective is to maximize your profits by creating arbitrage opportunities – moments when you can buy low, or sell high, for a profit.

MEV searchers are distinct from typical trading bots in two ways: 

1. Instead of looking at data already published on the blockchain, they focus on unconfirmed transactions in the mempool.
2. Beyond simply analyzing data, MEV algorithms can actively set up profit opportunities. They do this by inserting new transactions and controlling the order in which transactions in a block are processed.

The name “MEV” – short for Maximal Extractable Value – refers to maximizing the profit generated extracted from a given block of transactions. In the past, it was only miners themselves who could influence the mempool—this is why it was previously called Miner Extractable Value. However, with Ethereum now using validators instead of miners, and bots making it possible for anyone to engage with MEV strategies, the name evolved to incorporate these wider possibilities.

How Do MEV Bots Work?

When you submit a transaction on the blockchain, it first goes into the mempool. This is where pending transactions wait before a validator puts them into a new block. This means the mempool is a huge respository of data about what is about to happen on the blockchain – including price fluctuations caused by large orders. MEV bots operate by sifting through that data, looking for ways to profit from it.

Front-Running

Front-running MEV bots capitalize on their ability to prioritize transactions. They monitor the blockchain mempool and identify opportunities. Once a profitable transaction is detected, these bots submit their own transaction with a higher gas fee, ensuring it gets priority. For example, if a large buy order is detected, the bot places a buy order ahead of it to benefit from the price increase that will result from the initial transaction.

Back-Running

Conversely, a back-running MEV bot spots opportunities to profit in the wake of a large transaction. For example, it might place a buy order immediately after a huge sell order on a DEX, capitalizing on the temporarily low price. The asset can then be sold on another exchange at a higher price.

Sandwiching

Sandwiching MEV bots take advantage of slippage and price movement caused by large trades. They execute two transactions: one before and one after a targeted transaction. This effectively sandwiches the target transaction between the bot’s trades, extracting value at the trader’s expense. Sandwich attacks can be particularly harmful in DeFi markets, as it exploits traders by increasing costs and reducing returns.

MEV Bots in Action – Front Running Example

Consider a scenario involving a decentralized exchange (DEX). Suppose a trader submits a large buy order for a token, which can then be sold for a higher price elsewhere. This is exactly the type of transaction a MEV bot can profit from.

• The MEV bot detects this pending transaction in the mempool, and knows it there is profit to be made from arbitrage elsewhere.
• MEV searcher will front-run the target trade – inserting its own, identical transaction for the same asset, right before it.
• The bot ensures the validator prioritises its own transaction by optimizing the gas fee.
• The MEV bot “snipes” the sale, getting the crypto at a desirable price in order to sell it on another platform at profit.
• The trader behind the target transaction leaves with far less crypto than they were expecting, because the MEV bot stole their idea and beat them to it.

This strategy, known as front running, allows MEV bots to extract value from mempool data. The bot gets a favourable trade, while the validator who builds the block gets a higher than usual gas price. Everyone is a winner – except the unsuspecting trader behind the target transaction. While profitable for the bot operator, such practices can increase costs for other traders and disrupt market dynamics.

How MEV Bots Ensure Their Transactions Are Prioritised

But hang on a second – blocks are created by validators (also known as block builders), not bots. How does a MEV bot ensure their transactions are positioned in the right order in the block? There are two possibilities:

Gas Fee Optimization

The MEV bot will make sure your transactions enter the new block at the right point to ensure only you can take advantage of this opportunity. MEV bots do this by calculating exactly how much gas you should pay for the transaction. For example, the bot may submit its own transaction with a higher gas fee to ensure it is processed before or after the target transaction. By influencing the transaction order within a block, MEV bot users maximize profits.

Flashbots MEV Marketplace

Alternatively, the MEV bot can communicate directly with the validator (block builder) who is in charge of creating the block. A platform called Flashbots has created a marketplace of validators for this purpose – searcher bots can ask validators to structure their block in a way that profits the bot user, and incentivize the validator to do so with a “tip”. The Flashbots platform allows MEV bots to bypass the mempool altogether, and directly influence the block builder instead.

Key Features of MEV Bots

MEV bots have a couple of key functions that enable them to seek out and exploit profit opportunities among pending transactions:

1. Mempool Analysis

In the most basic sense, MEV searchers scan the mempool for opportunities. They can parse huge amounts of data quickly, calculating the outcomes of pending transactions before they happen.

2. DeFi Ecosystem Analysis

MEV transactions are generally part of a broader strategy of crypto arbitrage, which in simplest form means buying something cheap and selling is for more elsewhere. In order to spot these opportunities, MEV bots must constantly scan large swathes of the market, looking for arbitrage opportunities between platforms. Occasionally, there will even be profit opportunities buying and selling on the same platform – known as triangular arbitrage.

3. Gas Fee Calculation

MEV bots carefully manage gas fees to ensure their transactions are prioritized by block builders. By offering higher fees than competing transactions, they secure a better position within a block. At the same time, these bots aim to minimize unnecessary gas expenditure to preserve profits. This delicate balance between offering competitive fees and maintaining profitability is a sign of successful MEV algorithms.

MEV Bot Scams

MEV bots are a fascinating piece of technology that exploit the minute details of how blockchain transactions operate – but they are also a fertile ground for scammers. They are essentially pieces of code, and since not everyone is comfortable with coding, crypto traders are seeking out “How to build a MEV Bot” tutorials online, and other quick ways to engage with this technology. This allows scammers to exploit your knowledge gap in a couple of ways.

• Online “MEV Bot coding tutorials” often guide unsuspecting users to run malicious code that simply drains their wallet.
• Similarly, “influencers” who offer to let you use their own MEV bot to earn passive income are nearly always using the bot to access your funds.

In short, if anyone asks you to run any sort of code on your crypto wallet, it’s likely a scam. The only safe way of engaging with MEV bots is to learn how to create one from scratch.

What’s a MEV Bot Attack?

By definition, searcher bots create an opportunity for their users by taking the profit from another trader. In effect, they “steal” ideas from the mempool and give it to their user, via their ability to influence the final block.

One recent MEV bot attack on Uniswap saw a trader lose more than $200k when he was targeted by a sandwich attack. These tactics can distort execution prices on trades, and push up gas fees for the DeFi community.

Advantages of MEV Bots

MEV bots offer certain advantages that can enhance blockchain operations and improve overall market efficiency. They play a significant role in the DeFi ecosystem, leveraging automation and rapid transaction execution. They offer:

• Market Efficiency: By identifying and exploiting arbitrage opportunities, MEV bots help reduce price discrepancies across exchanges. Consequently, this leads to better market prices.
• Increased Liquidity: At the same time, MEV bots provide additional liquidity in trading pools, ensuring trades can occur even during volatile periods.
• Automation of Complex Strategies: These bots execute complex strategies, such as arbitrage or liquidation, that would be challenging for humans to perform manually at scale.
• Support for DeFi Protocols: MEV bots contribute to the health of lending platforms by liquidating undercollateralized loans, ensuring solvency and stability.

Risks of MEV Bots

Despite their advantages, MEV bots introduce significant risks that can undermine the fairness and stability of blockchain ecosystems. Their operation often prioritizes profits over user experience or network health:

• User Exploitation: Strategies like front-running and sandwiching directly harm traders by increasing costs and reducing returns.
• Network Congestion: MEV bots often bid up gas fees to prioritize their transactions. Consequently, this leads to congestion and higher costs for everyone.
• Centralization Concerns: The dominance of MEV bots in transaction ordering can create centralization risks.
• Volatility Amplification: Bots that engage in liquidation or flash loans can worsen market volatility.

Who Can Use a Mev Bot?

Although the term “Miner Extractable Value” suggests that miners or validators are the primary users, MEV bots are accessible to a broader range of participants. Developers and experienced traders can deploy these bots by leveraging open-source tools and blockchain knowledge.

Creating and running an effective MEV bot requires technical expertise, including familiarity with blockchain mechanics, programming, and market dynamics. Even with AI tools accelerating the coding process, knowledge of the market and blockchain mechanics is still crucial.

Lastly, having the knowledge and the right code won’t do anything without the right API. Creating a MEV bot is a complex task that could cost you countless hours. In the end, it might not even be worth it.

How Are MEV Bots Changing Crypto Trading?

MEV bots push the boundaries of on-chain analysis, utilizing mempool data to anticipate market movements before they are publicly visible. This enables the user to proactively influence the processing of transactions in the mempool. As a result, the mempool turns into a new battleground for the most knowledgeable traders.

Furthermore, by exploiting blockchain-specific dynamics like slippage, they create opportunities that benefit their operators while influencing market behavior. This has raised questions about the fairness and transparency in decentralized markets.

Other Types of Crypto Trading Bots

Beyond front-running and sandwiching MEV bots, the crypto ecosystem hosts a variety of trading bots that leverage different strategies to maximize profitability. These bots often operate in niche areas such as decentralized finance (DeFi) protocols. Some of the most notable types include:

Sniper Bots

Crypto sniper bots steal favourable trades from other users thanks to their ability to spot and execute opportunities faster than a human being. These programs can complete a trade in milliseconds, automating the whole process via pre-set criteria chosen by the user.

Flash Loan Bots

Flash loan bots utilize the concept of flash loans, unsecured loans that must be repaid within a single blockchain transaction. These bots perform complex operations that would typically require significant capital, but the flash loan allows them to execute trades without upfront funds.

A flash loan bot might borrow funds to execute an arbitrage trade across several exchanges, profiting from price differences. Flash loan bots are powerful tools that require sophisticated programming and strategic planning, making them popular among advanced traders and developers.

Liquidation Bots

This type of bot targets undercollateralized loans on DeFi lending platforms. When a borrower’s collateral falls below the required threshold due to price fluctuations, these bots step in to liquidate the position. By doing so, they earn a reward or a percentage of the liquidated collateral, as incentivized by the protocol.

For example, if a borrower’s collateralized debt position on a platform like Aave or MakerDAO becomes undercollateralized, a liquidation bot will execute a transaction to seize and sell the collateral. This helps maintain the health of lending protocols. On the other hand, it puts price pressure during market downturns.

Closing Thoughts

MEV bots represent a fascinating combination of blockchain transparency, technical innovation, and financial strategy. They use mempool data and advanced algorithms, transforming transaction processing and profit extraction in crypto markets.

On the downside, these bots also introduce new market stability challenges. But either way, if you’re considering trading crypto, a basic understanding of MEV bots and their impact is a must.

About the author

Tasho Tashev

Tasho is a passionate enthusiast of all things blockchain, Web3 and cryptocurrency. With a keen interest in the cutting-edge intersection of technology and entertainment, he loves sharing stories that inform and inspire.

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