A software application known as a “MEV bot” is capable of identifying and taking advantage of lucrative chances on the Ethereum blockchain through the manipulation of transaction order within a block. Maximal Extractable Value, or MEV for short, is the highest value that may be obtained by players with the power to sway a block’s outcome.
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Typically, MEV bots are made to execute frontrunning, flash loans, arbitrage, and sandwiching methods. These tactics include using decentralized exchanges (DEXs) like Uniswap and PancakeSwap’s pricing differentials, transaction ordering, and transient liquidity to your benefit.
This post will define MEV, describe how MEV bots work, discuss the advantages and disadvantages of utilizing MEV bots, and provide some real-world instances of MEV bots in action.
What is MEV?
The term “MEV” refers to the value that players with the ability to affect a block’s outcome might derive from it. For instance, in order to increase their earnings, miners can rearrange, add, or remove transactions from a block. In a similar vein, traders can affect how other transactions in a block are carried out by submitting their own transactions to the mempool, or pool of pending transactions.
The Ethereum system executes transactions in batches known as blocks rather than all at once, which gives rise to MEV. There is a maximum size for each block and a maximum number of transactions that can be included. As a result, users are competing to have their transactions added to the following block. By giving the miners larger fees (referred to as “gas”), users can improve the likelihood that their transactions will be confirmed.
On the other hand, this gives other users a chance to see the pending transactions in the mempool and attempt to take advantage of them. A user may attempt to purchase the same token before the original order is fulfilled, for instance, if they notice a sizable buy order for it on a DEX. They might then sell the token back at a higher price once the initial order has increased the token’s demand and price. This is one of the most prevalent types of MEV and is referred to as frontrunning.
How are MEV bots run?
MEV bots are computer programs that use algorithms to find and take advantage of lucrative MEV possibilities on the Ethereum network. To communicate with DEXs, other smart contracts, and Ethereum nodes, they usually employ web3 libraries and APIs.
MEV bots can function in various ways based on their goal and approach. Several typical MEV bot types include:
Bots that trade arbitrage: These bots search for price discrepancies between the same asset on various markets and place transactions to take advantage of them. An arbitrage bot may purchase a token on Uniswap and resell it on Sushiswap for a profit, for instance, if it is less expensive there.
Bots that aim to execute transactions before humans by scanning the mempool for large or profitable transactions are known as frontrunning bots. For instance, a bot may attempt to purchase the same token before the original order is fulfilled if it notices a sizable buy order for that token on a DEX. It may then sell the token back at a higher price once the initial order has increased the token’s demand and price.
Bots that “sandwich” another transaction: These bots use a combination of frontrunning and backrunning, which is the reverse of frontrunning. For instance, a bot may attempt to frontrun—buy the same token before the original order is executed—if it notices a huge buy order for that token on a DEX. It may then try to sell the token back once another bot or person purchases it at a higher price.
Flash loan bots: These bots carry out intricate trades requiring substantial sums of money by using flash loans, which are short-term loans that are reimbursed inside the same block. For instance, a bot may borrow a sizable quantity of ETH via a flash loan, exchange it for another token on one DEX, exchange it back for ETH on another DEX, then pay back the loan with interest all in the same block. This can give the bot a net profit if done properly.
What advantages and disadvantages come with employing MEV bots?
MEV bots can help consumers and operators in a number of ways, including:
Revenue generation: By seizing lucrative chances on the blockchain, MEV bots might bring in money for their owners. Certain MEV bots have the option to distribute their earnings to investors or users who supply them with funds or liquidity to run their businesses.
Increasing liquidity, decreasing price disparities, and promoting price discovery are all ways that MEV bots can make the market more efficient. By combining or streamlining their transactions, they can also assist customers in saving money on gas fees.
Increasing innovation: By developing new use cases, goods, and services, MEV bots can increase the Ethereum ecosystem’s creativity and progress. They may also stimulate fresh investigations and approaches to deal with the drawbacks and restrictions of MEV.
Diminished Fairness: By favoring individuals with greater wealth, knowledge, or sway over the blockchain, MEV bots might diminish market transparency and fairness. They may also be detrimental to other users’ interests who are unable to oppose MEV bots or are not aware of their existence.
Increasing volatility: By causing abrupt price swings, spikes, and falls, MEV bots can make the market more unpredictable and volatile. Additionally, they have the power to start feedback loops or cascade effects that will increase the effect of MEV.
Danger to security: By providing incentives for dishonest or malevolent behavior, MEV bots have the potential to jeopardize the stability and security of the blockchain. Certain MEV bots, for instance, have the ability to take advantage of flaws or vulnerabilities in smart contracts, or they can work with miners or validators to rig a block’s transaction order or inclusion.
How do MEV bots operate in real-world scenarios?
On the Ethereum network, MEV bots are widely used and active, and they have been a part of a number of noteworthy incidents and events. Here are a few instances of MEV bots in action:
A sandwiching bot sandwiched a big trade on Uniswap that was started by a hedge fund and made over $4 million in profit in September 2022. The bot made two trades before and after the initial trade, borrowing more than $300 million in tokens through a flash loan. This resulted in a 0.3% net profit.
A Harvest Finance protocol issue was exploited by a frontrunning bot in October 2022, which let it to siphon out almost $24 million from the pools. The bot made a net profit of more than 10,000% by manipulating stablecoin values on Curve Finance through the use of a flash loan. It then exchanged those stablecoins for Harvest Finance tokens at an inflated cost.
An arbitrage bot between Sushiswap and Bancor Network produced over $1 million in profit in November 2022. The bot made two deals on separate DEXs and borrowed tokens totaling over $7 million using a flash loan. This resulted in a net profit of 0.015%.
Conclusion
A software application known as a “MEV bot” is capable of identifying and taking advantage of lucrative chances on the Ethereum blockchain through the manipulation of transaction order within a block. MEV bots are capable of frontrunning, flash loans, arbitrage, and sandwiching.
MEV bots can benefit users and operators in a number of ways, including increased revenue, increased productivity, and increased innovation. They do, however, also provide a number of dangers and difficulties, including a decrease in fairness, an increase in volatility, and a threat to security.
On the Ethereum network, MEV bots are widely used and active, and they have been a part of a number of noteworthy incidents and events. As a result, everyone with an interest in cryptocurrencies and blockchain technology ought to be knowledgeable about MEV bots and how they operate.