Maximal Extractable Value (MEV) Bots Profit Strategies Explained

MEV Bots Overview
MEV Bots have started to receive new interest again as TradingView published an article describing how a bot on the ETH network made over 40MM USD over the last year. That is serious $$$. But what exactly is a MEV Bot? A MEV (Maximal Extractable Value) bot is an automated software program designed to exploit opportunities for extracting the maximum value from blockchain networks, particularly on platforms like Ethereum. These bots leverage their ability to influence transaction order or content, allowing them to take advantage of profitable scenarios. MEV bots can engage in activities such as front-running, where they preemptively submit transactions with higher gas fees to prioritize their execution over others. They can also execute sandwich attacks, inserting their own transactions between targeted transactions to profit from price discrepancies. MEV bots aim to maximize their financial gains by strategically manipulating the blockchain ecosystem, but their actions have raised ethical concerns regarding fairness and market integrity.

Profit Strategies
Before outlining some of the strategies, one underlying constant that is pre-conditional for the bot is connectiveness and monitoring: the MEV bot is constantly monitoring pending transactions on the blockchain and mempool to identify potential arbitrage or other profitable opportunities. It is known to monitor and look specifically for decentralized exchange trades or liquidation(s). Please note that these strategies are ethically questionable and can interfere with normal market activity; we do not endorse attempting these strategies in any way.

1. Front-running - When the bot identifies a profitable transaction, it attempts to front-run it by submitting a transaction with a higher gas price. This allows the bot's transaction to be prioritized and mined before the original transaction, potentially capturing the profit. How does it jump the queue with a higher gas price? When a user submits a transaction on the Ethereum network, they include a gas price, which determines the fee they are willing to pay to miners for including their transaction in a block. MEV bots exploit this by monitoring the mempool (the pool of pending transactions) for profitable transactions. When the bot identifies a transaction that presents an opportunity for front-running, it quickly submits its own transaction with a higher gas price. Miners, who prioritize transactions with higher gas fees, are incentivized to include the bot's transaction in the upcoming block ahead of the original transaction. By getting their transaction included first, the MEV bot can take advantage of the information it has about the pending transaction. For example, if the original transaction involves a decentralized exchange trade, the bot can quickly execute a similar trade before the original transaction occurs. This allows the bot to profit from the price impact caused by the user's trade. By paying a higher gas price, the MEV bot effectively jumps the queue and secures a favorable position for its own transaction, enabling it to front-run and potentially capture the profit that would have gone to the original transaction.

2. Transaction Replacement - Similar to the front running explanation above, the bot in some cases may also replace pending transactions that are about to be included in the next block. By submitting a higher gas price transaction that invalidates the original one, the bot can replace it and include its own transaction in the block instead. When the bot identifies a transaction that presents a lucrative opportunity, the bot swiftly submits a replacement transaction with a higher gas price but the same nonce as the original transaction. Miners, seeking to maximize their profits, are incentivized to include transactions with higher gas fees. When a miner encounters the replacement transaction with the higher gas price, they will typically prefer to include it in the block instead of the original transaction. As a result, the MEV bot's replacement transaction effectively replaces the original transaction in the upcoming block. This allows the bot to influence the content and order of transactions, ensuring that its own transaction is included

2. Sandwich Attacks - A sandwich attack exploits price discrepancies and profits from the trading activities of other participants on the Ethereum network. The Bot constantly monitora transactions and looks specifically for large trades or series of large trades that may impact price. The bot will essentially try to submit a "target transaction" that is large enough to impact the pricing of the large trade. Sandwich attacks require speed and precise timing since the bot needs to execute transactions before and after the target transaction. The bot aims to capture the price discrepancy between the pre-impact and post-impact prices caused by the target transaction. Because this strategy ultimately impacts the execution price of other market activity, this "strategy" is aptly called an "attack" and is not allowed in traditional markets.

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