After miners discovered they could manipulate the order of transactions, enabling them to preempt trades, capitalize on arbitrage prospects, or selectively block certain transactions the whole world of crypto has changed. They revealed the golden vein of MEV (Miner Extractable Value), and one of many tools that appeared to help them excavate it was MEV bots.
As this topic is quite wide, today we decided to cover some basics about MEV bots and take a closer look at one of the subtypes—crypto arbitrage trading bot.
One kind person from Reddit has once said: "MEV bots are like the ninjas of the blockchain world—they swoop in, make their move, and disappear before you even know they were there!" Whether you like them or not depends on your own trading experience and strategy.
What is a MEV bot anyway? They are automated programs launched in blockchain network environments that strategically order transactions for profit maximization. They’re programmed traders parasitizing on the unique trading opportunities in decentralized environments like Ethereum. This technology exploits the architecture of the blockchain, the roles of the market players, and any mechanics of trading that can potentially bring profit.
MEV Bots are highly active in decentralized exchanges (DEXs). An analysis reveals that they contribute substantially to trading activity, with MEV bots responsible for half of the trading volume on Uniswap.
The working logic of MEV bots involves several key steps to identify and exploit profitable opportunities on the blockchain:
1. Monitoring the mempool
The fastest access to the mempool, the storage for all pending transactions is a key for the MEV bot's success. This scanning is crucial to spot potential opportunities. One bot can access multiple pools to review and analyze all contained transactions.
2. Analyzing profit opportunities
The bots analyze the credentials of the unconfirmed transactions to spot the cases where they can profit. This involves assessing various factors such as gas fees, the nature of the transactions, and the timing. They look for patterns or opportunities like large trades, arbitrage possibilities, or liquidations. This step may take seconds or even milliseconds, and time for the decision is extra narrow as typically, your bot is not the only one lurking on the market.
3. MEV-strategic transaction execution
Once a profitable combination of the best-fit transaction or even a chain of transactions and the profit-extracting pattern is identified, the MEV bot will execute a transaction to capitalize on it. The classic strategies involve one of the following:
4. Gas price bidding
To ensure their transaction gets included in the next block before the opportunity fades, MEV bots often bid higher gas prices. To get the desired profit, the transaction should be executed anyway. As soon as it’s done, profit (minus fees) gets to the selected wallet.
5. Utilizing specialized platforms
Some MEV bots use platforms like Flashbots allow bots to directly submit their bundles of transactions to miners. This can bypass the public mempool, reducing the risk of being front-run by other bots.
|Profit Making: MEV bots earn substantial profits by rearranging transactions to take advantage of price differences and front-running in blockchain networks.
Fast Arbitrage: These bots rapidly spot and use price gaps across decentralized exchanges (DEXs), earning profits and aiding market efficiency.
Liquidity Boost: By serving as liquidity providers in DEXs, MEV bots improve market liquidity and lessen slippage, making trading smoother.
Enhancing Market Dynamics: MEV bots encourage quick response to market changes, promoting competition and fairness in the market.
|Unfair Advantage: MEV bots can disproportionately benefit those with high technical expertise and resources, potentially sidelining smaller market participants.
Network Pressure: These bots can slow transaction confirmations and increase fees for others, impacting blockchain network efficiency.
Manipulation Concerns: MEV bots pose a risk of engaging in dubious activities like preempting trades, which could erode trust and fairness in the market, underscoring the need for effective regulation.
Centralization Trend: The dominance of MEV bots risks centralizing power among a few, diverging from the ideal of decentralization in the cryptocurrency world.
In the realm of MEV, different types of bots exist, each with unique strategies. They all exist in the competition, and those demonstrating zero efficiency disappear fast. And it’s true that to create a new efficient MEV bot you have to possess a solid technical background or have enough money to invest in a profitable MEV bot acquisition.
For those wondering how to get a MEV bot, there are mainly two routes: specific development or acquisition of a ready-made solution.
Developing a bot requires technical expertise, a vision of MEV strategy, strong knowledge of the market, and smart contract programming. For those less technically inclined, acquiring a pre-built bot or using services from platforms like Flashbots can be a viable alternative. These platforms offer tools and frameworks that facilitate the deployment and operation of MEV strategies. But you should understand that in the second scenario, you can get limited functionality and expect less flexibility from the MEV bot.
The process of creating a MEV bot crypto may be delegated to the professional team or conducted by yourself. Creating an MEV bot involves choosing the right smart contract system to work with, creating a logic for monitoring pending transactions, and a mechanism for executing profitable trades based on detected opportunities.
MEV strategy development is also a crucial phase. For example, you might have an idea of an algorithm for your arbitrage crypto bot that can compare prices across different exchanges and execute trades under profitable conditions faster than anyone else. Developers often use languages like Solidity to create the underlying code for MEV bot arbitrage strategies.
Finally, testing helps you reveal any problems in the environment similar to the production before you deploy the MEV bot live. The development of such a tool is quite an expensive investment, so it’s better to check it twice before running it online.
P.S. Read this latest research on the topic, we’ve enjoyed it so much.
A crypto arbitrage bot functions by examining various exchanges to leverage differences in pricing. For example, if Bitcoin is priced more affordably on Coinbase than on Binance, the bot might purchase on Coinbase and offload on Binance, thus benefiting from the price gap. Such a crypto arbitrage trading bot is especially advantageous in fluctuating markets, where price variations across exchanges tend to be frequent.
An arbitrage MEV bot differs from a standard arbitrage bot by focusing on opportunities within the DeFi ecosystem. Unlike traditional crypto arbitrage bots, which operate between centralized exchanges, these bots scan for arbitrage opportunities directly on the blockchain, often exploiting differences in token prices in different liquidity pools or even within a single pool across different transactions.
To benefit from the difference in the assets' prices on various exchanges, the arbitrage bot should:
By exploiting price discrepancies between different exchanges or tokens, a crypto arbitrage bot can generate significant profits while mitigating the risks associated with volatile market conditions through the use of arbitrage bots.
A profitable arbitrage MEV bot, designed specifically for exploiting price discrepancies across different platforms or within a single platform, is a complex structure of multiple functional layers. Let’s have a look at them.
So you see that creating an MEV arbitrage bot is like following a detailed recipe. Blend your technical skills, mix with market understanding, and pour gently your strategic execution into the bowl of your bot, but always be ready to be smashed by the market competition. Those chefs got on blockchain “kitchen” long before you, but still, you have a chance.
Understanding what your strong sides are in the critical components like smart contract interaction, risk management, and security is vital. Ethical considerations and security risks are also essential to take into account as we all have to maintain fairness and decentralization in the blockchain ecosystem. The success of your MEV bot lies in harmonizing these elements, much like baking a perfect cake, and putting an extra cherry pick on top—with a sparkle of an innovative idea of MEV strategies.