Bots of frontrunning, or MEV (Miner Extractable Value), are becoming increasingly popular in the blockchain as a way to make money.
MEV is an economic phenomenon that can be exploited by miners, validators, and sequencers who have the ability to include, exclude, or arbitrarily reorder transactions in the blocks they produce. MEV strategies involve executing a set of interactions on the chain with the goal of ending up with more money than you started with.
However, due to the growing popularity of MEV in the crypto markets, there has been an influx of automated “bots” designed to exploit MEV opportunities before anyone else can. These bots have made it challenging for MEV strategies to remain profitable as they can execute MEV opportunities faster than individuals.
Here is an example of how frontrunners and MEVs can be used to make money in cryptocurrency trading.
Let’s say a large trade on Uniswap creates a $10,000 arbitrage, and an arbitrage bot quickly identifies this opportunity. To ensure that the transaction is processed first, they submit the order with a small fee of $10 – enough to be noticed by miners. However, other smart bots have likely also seen this chance and will offer higher gas fees in an attempt to compete with the original bot and grab that lucrative arbitrage for themselves. The battle for the right to exploit the arbitrage is known as Gas Priority Auction (PGA).
A miner may also realize the opportunity and capture it for themselves by verifying their transactions instead of the arbitrageurs.
MEV Strategies:
MEV strategies allow users to increase their profits through a series of interactions on the chain. By quickly responding to changes in the decentralized financial space, these MEV traders can capture value in any situation, regardless of market conditions. As more people learn and understand MEV, the competition for profitable opportunities only intensifies, requiring even faster reactions. This makes MEV an invaluable tool for quick and profitable trades if users can quickly identify favorable opportunities and fully understand how to execute MEV strategies better.
Examples of common MEV strategies include:
- Sandwiches:
Sandwiching is a popular form of market exploitation on the blockchain, and traders have become notoriously adept at seizing potential opportunities. For example, when a large order is detected (e.g., an order to buy 100,000 USDC on Ethereum through Uniswap) awaiting confirmation, smart traders or miners can anticipate the price change that will occur for the cryptocurrency once confirmed. By buying Ethereum just before the order confirmation and selling it shortly afterward, they can make a considerable profit by ‘riding the wave.’ Thus, sandwiches show how experienced and agile blockchain traders can be when they have the opportunity.
- Anticipation:
Frontrunning is the practice of buying or selling a financial asset before large orders are executed to gain an advantage over other traders. In the MEV world, this translates to miners, validators, and sequencers being able to exploit MEV opportunities by executing transactions before anyone else can.
By simulating unconfirmed transactions, a frontrunning bot can observe any resulting state changes and identify arbitrage opportunities in the form of an increased account balance from the initial wallet. It then replicates the original transaction by copying all related data fields and checks if its own simulated transaction would result in a higher balance. If it does, it will attempt to send its copy of the same transaction with a higher gas price as frontrunning to benefit from that advantage.
By using these strategies, frontrunners open up possibilities to capture these arbitrage opportunities in mere moments due to their automated nature that can monitor multiple variables simultaneously.
- Arbitrage:
Arbitrage is the process of buying and selling the same assets on different markets to capitalize on price discrepancies between them. MEV traders can exploit MEV opportunities by monitoring changes in the decentralized financial space, such as an increase or decrease in the liquidity of a specific asset. They then exploit these situations by executing trades that benefit from market price differences.
Traders can also use arbitrage to reduce their exposure to risk by buying assets in one market and simultaneously selling them in another, creating a net-zero transaction that still generates profit.
- PGA:
Gas Priority Auctions (PGAs) are common MEVs that occur when two or more bots/traders compete for the same opportunity by increasing gas fees. Initially, PGAs created significant amounts of spam and reversed transactions on the Ethereum network, causing congestion and hindering the use of MEV strategies. Fortunately, Flashbots managed to eliminate most of them from Ethereum.
Despite this progress, PGA strategies have resurfaced due to the growing popularity of new EVM-compatible chains with lower fees and shorter block times. As these networks expand, the number of PGAs that can exploit their advantageous parameters for MEV opportunities also increases.
- Long Tail MEV:
Long Tail MEV (LTM) is an MEV strategy that takes advantage of how Ethereum processes transactions. Ethereum miners process transactions in batches, and those with higher gas fees are prioritized first in their batch. This structure allows MEV traders to wait for their transactions to be assigned to a later batch, thereby increasing potential MEV profits as gas prices rise over time.
LTM strategies are especially favored by traders using MEV bots, as they can simulate MEV opportunities and optimize their profits by adding more MEVs to their execution strategy. This type of MEV technique requires a sophisticated MEV bot that can monitor markets and execute MEV transactions efficiently.
Downsides of MEVs:
An MEV transaction has the potential to negatively impact users by exploiting their trades for personal gain by a miner or arbitrage bot. Specifically, this would be done through what is known as a ‘sandwich,’ where the miner or arbitrage bot places their buy and sell orders around the user’s order to receive an instant profit when the user inadvertently executes at an artificially inflated price.
MEV strategies also have their risks; if done incorrectly, it is possible to lose money instead of making a profit.
Flashbots:
Flashbots is an organization that provides a suitable approach to addressing potential risks associated with Miner Extractable Value (MEV) on Ethereum’s smart contract blockchains. The ecosystem proposes a transparent, permissionless, and fair MEV framework that preserves Ethereum’s ideals.
As technology advances, smart contracts will become increasingly prevalent in various sectors, making it our organization’s responsibility to provide a proper solution to this critical problem. To ensure this, extensive research and development have been deployed to assess the effectiveness of security protocols and economic models supporting the Flashbots’ patented architecture. We believe this comprehensive solution will be an integral component of blockchain ecosystems.
How to Beat MEV Bots:
Fortunately, there are ways for traders to stay ahead of MEV bots. These include:
- Understanding the underlying mechanics of MEV and then developing strategies that incorporate them.
- Researching the latest MEV trends, monitoring the market for MEV opportunities, and employing multiple signature transactions and batch transaction tactics to increase speed in executing MEV trades.
- Looking into MEV bots and understanding how they operate to find strategies to beat them.
- Using MEV services that offer advanced MEV trading tools, such as MEV scanners and automated MEV robots.
- Adopting MEV-resistant wallets or services, like Flashbots, that protect against MEV exploits.
Conclusion:
MEV is an incredibly lucrative and potentially dangerous trading strategy that can be leveraged to maximize profits on Ethereum. Traders should exercise caution when conducting MEV transactions due to the potential for losses and MEV bots that can take advantage of their trades for personal gain.
Fortunately, services like Flashbots have developed a secure, fair, and transparent MEV system that will protect users from MEV exploits in the future.
Strategies such as batch transactions, multi-signature transactions, and advanced MEV monitoring tools can help traders beat MEV bots. With the right knowledge and techniques, MEV can help you make money on Ethereum without risking too much capital or exposing yourself to excessive risks.
