MEV Bots: What They Are

MEV

MEV stands for “Miner Extractable Value” or “Maximum Extractable Value”. It refers to the potential profits that miners or validators can earn by selectively reordering, censoring, or including specific transactions in a block. MEV arises from the flexibility in processing transactions on the Ethereum network.

In other words, MEV is money that can be made by influencing the order in which transactions are processed on the Ethereum blockchain. This can be done by miners, who are responsible for creating blocks, or by other participants who can send transactions to the blockchain.

What is an MEV Bot

MEV bots are programs designed to identify and exploit MEV opportunities. They work by monitoring pending transactions on the blockchain and then rearranging them within a block to maximize block rewards and fees. This blockchain design flaw arises due to the lack of ordering rules in its current architecture, allowing validators to optimize the transaction order.

For example, an MEV bot can see that a large buy order for a particular token has been sent to the blockchain. The bot can then send its own buy order for the same token at a slightly higher price. Once the bot's order is executed, the token price will rise, and the bot can sell its tokens at a profit.

How MEV Bots Make Profit

MEV bots constantly scan the blockchain, engaging in activities such as arbitrage, frontrunning, and transaction fee manipulation.

Arbitrage: MEV bots can exploit price differences for an asset by simultaneously performing buy and sell transactions on various exchanges. Arbitrage is one of the most common methods of extracting MEV.

Frontrunning: MEV bots can monitor the mempool to determine which transactions will soon be included in a block. They then place their own transactions before or after the identified transactions to gain an advantage over other traders. Sometimes these transactions are combined, called a sandwich attack.

Liquidation: MEV bots monitor DeFi lending platforms like Aave for potential liquidations. By identifying undercollateralized loans in advance, these bots place bids to profit from subsequent price movements.

Bots also manipulate transaction fees to achieve a higher position, potentially at the expense of other traders.

Examples of MEV Bots in Action

In September 2022, an MEV bot earned over $4 million in profit by executing a sandwich attack on a large Uniswap trade initiated by a hedge fund. The bot used a flash loan to borrow over $300 million in tokens and performed two transactions before and after the initial trade, netting a 0.3% profit.

In October 2022, an MEV bot exploited a flaw in the Harvest Finance protocol, netting over $24 million from the protocol's pools. The bot used a flash loan to manipulate stablecoin prices on Curve Finance, then swapped them for Harvest Finance tokens at inflated prices, netting a profit of over $10,000.

One of the most popular MEV bots is Jaredfromsubway.eth, whose success has displaced many competitors and attracted attention from leading crypto media due to its sophisticated tactics.

Conclusion

MEV bots are a powerful tool for profit in the decentralized finance (DeFi) ecosystem. Unlike traditional finance, MEV trading is largely conducted in an unregulated environment. While frontrunning and other MEV strategies may be unethical, they are not illegal to the same extent as on traditional stock markets due to the public nature of pending order information on the blockchain.

MEV bots can be highly profitable for operators, but they can also be used to manipulate the market. This raises concerns about the security and fairness of the DeFi ecosystem.

Developers and regulators must find a balance between leveraging the benefits of MEV bots and mitigating potential risks to maintain the stability of the decentralized financial system.