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MEV bots: A revolution in decentralized finance or a threat to stability?

Feb 5, 2024
MEV bots: A revolution in decentralized finance or a threat to stability?
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MEV, which stands for "Miner Extractable Value" or "Maximum Extractable Value," refers to the potential profit available to miners or validators through specific manipulation of transactions in the blockchain. This includes changing the order of transactions, blocking them, or selectively choosing which to include in a block. This situation arises in the Ethereum network due to its ability to flexibly process transactions.

Simply put, MEV is the opportunity to make money by influencing how and in what order transactions are processed in the Ethereum blockchain. This can be done by miners as well as other system participants, directing transactions into the blockchain in a specific way.

Content:

MEV Bots: Revolution in Decentralized Finance or a Threat to Stability? - news

What is an MEV Bot

MEV bots are computer programs developed to search for and utilize opportunities associated with MEV. They function by analyzing transactions that have not yet been confirmed in the blockchain and changing their placement within the block to maximize the benefit from block creation and fees. This opportunity arises due to the lack of strict rules for ordering transactions in the blockchain's structure.

For example, an MEV bot may detect a large request to buy a certain cryptocurrency in the blockchain. The bot can quickly place its own request to buy the same currency, with a higher commission, so that the transaction is ahead of others. Once the bot's transaction is executed, the price of the currency will rise, and the bot will be able to sell it at a profit.

How to Profit with an MEV Bot

MEV bots constantly analyze the blockchain, using various strategies such as arbitrage, front-running transactions, and manipulating transaction fees to make a profit.

Strategy Description
Arbitrage These bots find and utilize price differences in assets on different DEX exchanges, conducting simultaneous purchases and sales to profit from these differences. This is one of the main ways MEV bots earn.
Front-Running MEV bots monitor the pool of pending transactions and use this information to initiate their own transactions before or after the anticipated transactions to gain a competitive advantage. They may also conduct so-called "Sandwich Attacks," combining transactions.
Liquidation MEV bots monitor DeFi platforms, such as Aave, in search of opportunities to liquidate under-collateralized loans to profit from price changes.

These bots can also affect the cost of transaction fees to improve their chances of quick inclusion in a block, sometimes at the expense of other traders. Estimates show that MEV bots on the Ethereum blockchain have earned no less than 675 million dollars in the last two and a half years. The total MEV market volume, considering other blockchains such as Binance Smart Chain and Solana, potentially exceeds 1 billion dollars.

Examples of Bot Operations

In September 2022, one of the MEV bots managed to earn over 4 million dollars by conducting a sandwich attack on a significant transaction on the Uniswap platform, initiated by a hedge fund. The bot used an instant loan to borrow over 300 million dollars in tokens and executed two operations before and after the original transaction, earning it about 0.3% net profit.

In October of the same year, the MEV bot took advantage of a vulnerability in the Harvest Finance system and managed to withdraw more than $24 million from its pools. Using an instant loan, the bot manipulated the prices of stablecoins on Curve Finance, and then exchanged them for Harvest Finance tokens at an inflated price, earning more than 10,000% net profit.

An MEV bot named Jaredfromsubway.eth became one of the most famous in this area, successfully outperforming many competitors and attracting the attention of leading cryptocurrency media thanks to its sophisticated strategies. According to the MEV tracking site EigenPhi, in 2023 Jaredfromsubway.eth earned about 34 million dollars, and transaction fees on the blockchain reached 6 million dollars.

The bot Jaredfromsubway.eth specializes in front-running transactions with meme coins such as:

  • Pepe;
  • Wojak;
  • Chad.

They attract significant trader interest.

MEV bots are an effective tool for earning in the decentralized finance (DeFi) sphere. However, unlike traditional financial markets, MEV trading occurs mainly in an unregulated environment. Although front-running and other MEV strategies may seem unethical, they are not illegal to the same extent as on traditional markets, due to the openness of information about upcoming transactions in the blockchain.

MEV bots can bring substantial profit to their owners but can also be used to manipulate the market, raising concerns about security and fairness in the DeFi ecosystem.

Developers and regulators must find a balance between utilizing the advantages of MEV bots and mitigating potential risks to ensure stability in the decentralized financial sphere.

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