What is an MEV Bot? Understanding Its Role in Crypto Trading

Do you ever get the feeling that something is happening behind the scenes in the crypto space, but you are not seeing it? Well, you are not wrong!

That’s where MEV bots step in! These are somehow a type of crypto arbitrage bot (but not limited to) that is reshaping how transactions happen on the blockchain.

If you have never heard of it, you are not alone. And if you have heard of it but don’t get what it does, you are definitely not alone.

So, what exactly is MEV in crypto trading? How do they work? Will it help traders generate more profit? Or are you simply looking for a beginner’s guide to MEV bots?

In this blog, you will get answers to all questions. We’ll look at everything you need to know about MEV crypto bots.

Let’s get started!

What is an MEV Bot?

MEV (or Maximal Extractable Value) bots are automated programs that are designed to maximize the profit-generating value by exploiting opportunities within blockchain transactions. These operate within the DeFi ecosystem and utilize blockchain mechanics like transaction ordering, gas price bidding, and more to gain profits.

MEV bots are particularly effective in blockchain networks such as Ethereum, where miners or validators have complete control over the sequencing of transactions. It even analyzes mempool data (that is, pending transactions) and executes MEV trading strategies to extract significant value from several DeFi activities.

How MEV Bots Work?

Alright, so now that we have explained what MEV bots are, let’s talk about how they actually work!

Here’s how these bots function:

Real-Time Monitoring

MEV bots continuously scan the Ethereum mempool for specific types of profitable transactions. This includes large token swaps, arbitrage opportunities, and vulnerable liquidation events.

Strategic Insertion

Once a bot identifies a target transaction, it will attempt to insert its own transaction before the target in the block. This is often referred to as front-running or sandwich trading.

Execution

Next, the bot submits its transactions with a higher gas fee to incentivize miners or validators to prioritize them. By doing so, the bot ensures its trades are executed in the most beneficial order.

Profit Capture

By altering the transaction sequence, the MEV bots can seamlessly extract value, either by manipulating token prices, arbitrage price differences across decentralized exchanges (DEXs), or executing liquidations ahead of others.

Are MEV Bots Good or Bad?

Now, let’s see if developing MEV crypto trading bots is profitable or not!

Pros of MEV Bots

• Market Efficiency

MEV bots identify the price differences between exchanges and exploit them to gain profits by acting quickly on arbitrage opportunities. This improves pricing accuracy across DeFi platforms and makes trading efficient for all users, especially in volatile markets.

• Revenue for Validators/Miners

By paying higher gas fees, MEV bots give validators more income for processing transactions. This added reward helps secure the network and encourages more people to participate as validators in blockchain networks like Ethereum.

• DeFi Tool Innovation

The rise of MEV has led to new tools and platforms like Flashbots, which aim to make MEV extraction more transparent. These tools help developers build better DeFi systems with improved security and performance.

• Exposes Weaknesses in Code

MEV activity often reveals flaws in smart contracts. This shows developers where improvements are needed. Fixing these issues leads to safer, more reliable DeFi apps that can better handle real-world conditions and malicious activity.

Cons of MEV Bots

• User Exploitation

Bots can sandwich attack crypto trades, front-running to buy before and back-running to sell after, which makes a profit but at the user’s expense. This worsens trade execution and harms inexperienced users, especially in low-liquidity pools with minimal crypto slippage protection.

• Network Congestion

MEV bots engage in crypto gas wars to prioritize transactions. This creates congestion and pushes up transaction fees for everyone, which makes DeFi more expensive and less accessible, especially for smaller users.

• Centralization Risk

MEV bots often rely on private tools and faster access to transaction data. This gives an unfair advantage to large players and can lead to centralization, which goes against the open and equal nature of blockchains.

• Poor User Experience

Users may face failed or delayed transactions, slippage, or front-running due to MEV bots. This reduces trust in DeFi platforms, especially for newbies, which makes DeFi platforms complex for new users.

Common MEV Strategies

Now, let’s have a look at some of the most common strategies that MEV trading bots use:

Arbitrage

The arbitrage MEV bot involves identifying and exploiting price differences for the same asset across different decentralized exchange platforms. The bot monitors DEX liquidity pools for price differences, then submits a bundle of transactions to buy low on one exchange and sell high on another.

For Example:

A searcher notices that ETH is trading for 1,800 USDC on Uniswap and 1,805 USDC on Sushiswap. They execute a transaction that:

• Buys 10 ETH on Uniswap for 18,000 USDC
• Immediately sells the 10 ETH on Sushiswap for 18,050 USDC
• Profits 50 USDC

Sandwich Attacks

A sandwich attack is a form of transaction manipulation where an MEV bot places a buy order before and a sell order after a large user’s transaction to gain profit from slippage.

When a user submits a large trade, the bot detects this pending transaction in the mempool and:

• Front-runs it by buying ETH, which causes the price to rise.
• The user’s trade executes at the higher price.
• Back-runs it by selling ETH at the higher price and locking in profit.

For example:

A trader swaps 1,000 ETH for USDC. The bot buys ETH just before, which raises the price. The trader receives slightly fewer USDC due to slippage. The bot then sells its ETH back at a profit.

Liquidation Arbitrage

This strategy involves identifying and executing liquidations on undercollateralized positions in lending protocols to gain liquidation bonuses. When someone borrows crypto from platforms like Aave or Compound, they must keep enough collateral to cover their loan.

The platform uses a “health factor” to measure how safe its loan is. If the health factor drops below 1, their loan is no longer secure. At this point, the loan becomes eligible for liquidation, which means:

• Anyone (usually a bot) can repay part of the loan
• And in return, they get the borrower’s collateral at a discount

For example:

A user’s ETH collateral drops in value, which makes their loan on Aave undercollateralized. A bot initiates liquidation and repays $50,000 of the user’s debt in exchange for $52,500 in ETH collateral. And they gain a $2,500 bonus.

Frontrunning

Frontrunning is a strategy that MEV trading bots use that involves observing a profitable transaction in the mempool and submitting a similar or competitive transaction with a higher gas fee so that the trade executes profitably.

MEV bots use public mempool access to identify user trades. It then replicates the transaction and uses higher gas fees through Flashbots to get mined first.

For example:

• A user attempts to arbitrage a price gap between Uniswap and Curve.
• The bot detects this in the mempool, copies the transaction, increases the gas fee, and gets it included first.
• This enables the bot to secure the arbitrage profit for itself.

Backrunning

Backrunning is the process of executing a transaction immediately after a profitable transaction. It helps in gaining benefits from the resulting market conditions.

Bots utilizing the backrunning strategy track the mempool deeply. They place trades designed to profit after large swaps or liquidations.

For example:

• Let’s say someone with a lot of crypto sells a huge amount of Token X on a decentralized exchange like Uniswap.
• Because DEX prices are determined by supply and demand, this large sale causes the price of Token X to drop sharply.
• An MEV bot sees this sell transaction either just before or just after it happens.

Conclusion

That brings us to the end of this blog!.

MEV bots are a powerful tool within the DeFi space. While they contribute to market efficiency, validator revenue, and more, they also carry some cons.

The end call is yours, but on a profitable note, you must build an MEV bot that generates more profits.

So, if you want to build one, Technoloader stands out as the best choice! With deep blockchain expertise and a commitment to innovation, we deliver custom solutions that maximize profitability while following industry best practices.

So, get in touch with us and let’s develop your MEV trading bot!

FAQs

What is an MEV bot in crypto?

An MEV is a trading bot that extracts profit by reordering or inserting transactions on a blockchain. It often utilizes strategies such as front-running, back-running, or exploitation of arbitrage and liquidation opportunities.

How do MEV bots make money?

MEV bots make money by exploiting the order of transactions in a block. They may front-run users, perform arbitrage between exchanges, or liquidate risky loans on lending platforms to earn bonuses.

Is MEV legal in crypto trading?

Yes, MEV is legal because it operates within the rules of the blockchain, but some MEV strategies (like sandwich attacks) are controversial because they harm regular users.

What is a sandwich attack in crypto?

A sandwich attack is when a bot places one trade before and one after a user’s transaction. This manipulates the price to make the user pay more or receive less, which allows the bot to profit.

What is the difference between an MEV bot and an arbitrage bot?

An arbitrage bot profits from price differences between exchanges. An MEV bot may perform arbitrage but also profit by manipulating transaction order, which makes it more complex and powerful.

What blockchain networks are most affected by MEV bots?

Ethereum is most commonly affected by MEV bots due to its high DeFi activity, but other EVM-compatible chains like BNB Chain, Polygon, and Arbitrum also experience MEV activity.