What is an MEV Bot?

Maximal Extracable Value is a hidden tax on all types of Ethereum transactions.

That means any time you want to transact in DeFi: from buying or selling an NFT, lending tokens to a liquidity pool, or swapping one token for another, a group of opportunistic users known as “searchers” have the opportunity to see your trade, and manipulate the criteria surrounding your trade to ensure they make profit, at your expense.

The workhorses of MEV are MEV bots, programs designed to look for certain types of transactions that can be exploited to make money.

In this article, we’re going to be exploring MEV Bots in more detail, looking at how they work and the different types.

First, let’s take a look at what MEV is first, before jumping into bots.

What is MEV?

At its simplest, Maximal Extracable Value is a hidden tax on all types of Ethereum transactions. That means any time you want to transact in DeFi: from buying or selling an NFT, lending tokens to a liquidity pool, or swapping one token for another, a group of opportunistic users known as “searchers” have the opportunity to see your trade, and manipulate the criteria surrounding your trade to ensure they make profit, at your expense.

There are lots of different ways MEV can take place on Ethereum, which we’ll explore further down in the article. But for now, it’s important to understand the mechanics of MEV, and how Ethereum makes this all possible.

What is a MEV Bot?

MEV bots are programs designed to maximize profits by exploiting opportunities within blockchain transactions.

They operate on Ethereum, but also on chains where transaction ordering and gas price bidding are a feature.

By analyzing mempool data (pending transactions) and executing precise strategies, MEV bots can extract significant value from transactions across the DeFi space.

How Does a MEV Bot Work?

On Ethereum, validators, the entities responsible for verifying transactions, are allowed to re-arrange the order of transactions as they see fit. Validators typically do this if there are opportunities to improve the profit they receive from validating transactions.

Let’s take a closer look at this concept. When you submit a transaction on Ethereum, it does not immediately get added to the next block.

Instead, it first goes into the “mempool” which is the collection of all pending transactions. This pool is visible to anyone. You can see a screenshot of this below. And if you’re curious to see what it looks like, here’s a live feed.

Here is where MEV bots come in.

Because validators are not required to add transactions to the block in the same order that they were submitted by users, anyone can pay those validators to re-arrange transactions in a certain way.

This manipulation of the order of things allows MEV to happen. An MEV bot sometimes referred to as ‘searchers’ look for trades they can make money from.

In the next section we’ll look at what types of bots are there and what they are looking for.

What are the different types of MEV Bots?

Now we understand what an MEV bot does, let’s take a look at the different types of MEV Bot.

• Frontrunning Bots - Frontrunning bots place transactions ahead of others by outbidding them in gas fees. They look for high-value trades in the mempool with certain features inh high slippage or lo typically focus on high-value transactions where their execution priority can yield significant profits. Learn more about frontrunning.

• Backrunning Bots - Backrunning is a specific type of MEV (Maximal Extractable Value) which causes some traders to miss out on potential profit opportunities from their trades. In practice, backrunning involves strategically executing a transaction immediately after another, high-value transaction. By doing this, the backrunning transaction capitalizes on the arbitrage opportunity left over from the price impact of the initial transaction. Learn more about backrunning.

• Sandwich Bots - Sandwich attacks occur when a user’s transaction gets trapped, or “sandwiched,” between two hostile transactions — one before and one after. As a result, the original transaction executes at a much higher price than necessary, leading to an inflated price for the original trader and a profit for the malicious trader placing the two extra trades (known as a “searcher”). Learn more about sandwich attacks.

• Arbitrage/LVR Bots - MEV arbitrage bots identify and exploit price differences for the same asset across different decentralized exchanges or DEXes. This is also known as loss versus rebalancing. These bots look for a token price to be higher or lower on different exchanges, and then exploit the price difference between the two. Many liquidity providers haven’t even heard of LVR, but it costs them 5–7% of their liquidity, resulting in hundreds of millions lost each year. In fact, when accounting for LVR, many of the largest liquidity pools are not profitable for LPs at all. Learn more about LVR.

• Liquidation Bots - Liquidation bots specialise in monitoring lending platforms looking for undercollateralized loans. If a borrower’s collateral falls below a required threshold, these bots execute liquidation transactions to claim rewards.

• Flash Loan Bots - Technically not an MEV bot in the strictest sense, flash loan bots work to finance and facilitate MEV by utilizing flash loans. Flash loans are unsecured loans that must be repaid within a single transaction block. Flash Loan bots are often paired with bots above to facilitate the execution of MEV.

The key features of MEV Bots

There are a number of crucial features that make up how an MEV bot operates. Below are

Gas Fee Optimization

When bots are looking for potential trades to exploit, they also need to calculate how much gas is required to position its trade in a way that optimizes profits.

If the bot uses too much gas, it eats into potential profitability. Too little gas however, and it risks been gazumped by a rival bot. Bots are always trying to find a balance between profitability and efficiency.

The ability to analyse smart contracts

As MEV bots have become more sophisticated they are able to not only look at single trades, but often multiple ones, too.

Advanced MEV bots leverage algorithms to dive into smart contracts looking for exploitable patterns or lucrative opportunities.

MEV bots now have the capability to assess different conditions around a potential trade. They can look at liquidity pools - and how easily they can facilitate the trade - the tokens inside the contracts, and the arbitrage possibilities within these contracts.

Trading autonomy

For bots to be effective, they need to act quickly. Which is why MEV bots are designed to execute precise transactions just at the right time to maximise profits.

To do that, many MEV bots are trade on their own, looking for the right sort of trades and the right conditions and then executing on behalf of its owner.

Mempool Monitoring

MEV bots are designed to constantly monitor the mempool, looking for transactions that it can make profits from.

Because transactions aren’t executed straight away, these bots have time to analyse vast amounts of transactions, identifying which ones can be exploited. Depending on the bot, it will look for trades it can either frontrun, backrun, sandwich, or liquidate, as we explored in an earlier section.

How to beat MEV bots?

Beating MEV bots on your own can be tricky, but there are many avenues you can use to protect yourself from MEV Bots.

Reduce Slippage on Ethereum

The most basic defense against MEV is setting a low slippage tolerance. Slippage tolerance is essentially how much variation in the final price you receive you are willing to accept.

Transactions with a lower slippage tolerance give MEV bots less room to exploit trades.

For users who aren’t utilizing any other MEV protection tools, setting a lower slippage tolerance can be a good first line of defense, however it’s by no means a complete solution.

Setting the slippage tolerance too low often results in failed transactions. Even with optimal slippage, MEV bots may still be able to extract value from your trades.

So sometimes we need to do more than adjust our slippage.

Use a Custom RPC Endpoint on Ethereum

A better protection method is to install an MEV protection RPC endpoint. A Remote Procedure Call (RPC) endpoint is an intermediate layer that routes transactions from a user’s wallet to the blockchain itself.

One of the most popular specialized RPC endpoints is MEV Blocker. As the name suggests, MEV Blocker provides protection against MEV across all of Ethereum. The RPC works by managing a permissionless network of searchers and hiding transactions from the public mempool.

These searchers cannot frontrun or sandwich user transactions.

Instead, they capture value through backrunning. Anytime a searcher backruns a user’s transaction, the searcher keeps up to 10% of the value and sends the other 90% back to the user as a rebate.

Install MEV Blocker.

The best solution? Use an MEV-Protected DEX

CoW Swap is a meta DEX aggregator that finds the best prices for trades and provides comprehensive MEV protection. The protocol uses a unique trading mechanism that relies on batch auctions and intents to achieve the best outcomes for users.

Thanks to a powerful combination of delegated trade execution, batch auctions, and protected transaction flow through MEV Blocker, CoW Swap users benefit from thorough MEV protection on all trades.

Try CoW Swap.

In summary

MEV bots are pieces of software that have become embedded into the fabric of the DeFi ecosystem.

While there is an argument that they can help make markets run more efficiently, more often than not, they create an unfair advantage, helping sophisticated actors exploit those with less knowledge and expertise.

But that doesn’t mean you have to just accept MEV’s role in DeFi. There are plenty of tools and services which can help you live free from MEV bots.

You just have to know where to look. 👀