MEV bots generate profits through advanced transaction strategies such as front-running or sandwich attacks on crypto exchanges. How do these bots work, and why are they useful despite stealing millions of dollars?

What are MEV Bots, and How Do They Work?

The popularity of smart contract apps opens up loopholes for generating additional income, relying on market inefficiencies and specific features of Ethereum and other blockchain systems architecture. One such loophole is Miner Extractable Value (MEV), where validators on the Ethereum blockchain increase their profits by influencing the order of transactions when creating a block. This practice often results in other users bearing losses.

In the blockchain world, transaction priority and gas fees significantly affect network efficiency. Leading blockchain platforms like Ethereum and Solana use validator pools to confirm transactions. Users can speed up their transactions by paying higher fees. However, this approach has led to the rise of MEV bots, which attempt to extract maximum profit from user transactions. These bots have become significant in the gas fee debate, especially on Ethereum and Solana.

How MEV Bots Make a Profit

MEV bots operate as blockchain scanners, engaging in arbitrage, front-running, and transaction fee manipulation:

  • Arbitrage: These bots exploit price differences of an asset by executing buy and sell transactions simultaneously on different exchanges.
  • Front-Running: MEV bots monitor the mempool to identify upcoming transactions and then place their own transactions before or after these identified transactions to gain an advantage.
  • Sandwich Attacks: A combination of front-running and back-running, where bots place their transactions around a target transaction to profit from price changes.
  • Liquidations: MEV bots monitor DeFi borrowing and lending platforms for potential liquidations and submit bids to profit from subsequent price movements.
  • Transaction Fee Manipulation: Bots manipulate fees to gain higher priority, often at the expense of other traders. These activities earned over $313.7 million in 2021-2023.

MEV Bots and Blockchain Protocols Ravage

In September 2022, an arbitrage bot hack resulted in the loss of 1,100 ETH, affecting many users. In October 2023, a MEV bot on the BNB Chain made a profit of $1.575 million through a Flash Lending attack on PancakeSwap, with a cost of only $4.16. In November 2023, an arbitration bot was hacked and lost about $2 million on the Curve Finance platform. In April, MEV bot groups lost more than $25.38 million in an attack on the Ethereum blockchain, where a hacker replaced transactions with malicious ones.

How to Deal with MEV Bots

Various approaches can help users reduce the potential impact of MEV bots on their transactions:

  • Check transaction fees before submitting requests.
  • Use DeFi platforms with built-in MEV protection or dedicated protection tools.
  • Platforms like UniSwapX, 1inch, and PancakeSwap allow users to set slippage tolerance, defining a minimum acceptable number of tokens received when the price changes.

Why It’s Still Worth Considering MEV Bots

Unlike traditional finance, MEV trading occurs primarily in an unregulated environment. Frontrunning and other MEV strategies, while potentially unethical, are not illegal due to the public availability of information about pending orders on the blockchain. MEV bots can be highly profitable for operators but may also be used for market manipulation, raising concerns about the security and fairness of the DeFi ecosystem.

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