MEV Trading Bot: Understanding its Types, Working and Benefits
MEV bots are of five types, including the following:
- Arbitrage Bot
An MEV arbitrage bot actively observes trading activities on decentralized exchanges (DEXes) and exploits price divergences. For instance, it might strategically place a buy order right before a significant buy order on a DEX, leveraging the ensuing price surge to its advantage.
- Sandwich Attacks
A sandwich attack refers to a strategy in which the MEV bot strategically positions its trades between substantial buy and sell orders. It aims to generate profits for the bot while being potentially disadvantageous to other traders in the process.
- Liquidation Bot
A liquidation MEV trading bot is capable of autonomously seizing and selling collateral once its value falls below a certain threshold, thereby generating profits through the liquidation procedure.
- Frontrunning Bot
A frontrunning bot strategically arranges its transactions to precede others in the queue, aiming to capitalize on predicted price shifts. By executing trades ahead of substantial market orders, these bots can leverage price fluctuations and harness the resulting volatility to generate profits.
- Flash Loan Bot
Through flash loan utilization, this MEV trading bot can partake in intricate trading tactics and profit from transient market disparities. The borrowed funds are commonly repaid within the same transaction, thereby reducing the risk for the bot operator.
Working of an MEV Bot
MEV bots autonomously identify and execute profitable transactions. A major reason for the rise of MEV bots can be attributed to Ethereum’s transaction batching system, where transactions are grouped into blocks of limited size. This setup leads to intense competition among users who want to add their transactions in the next block, often resorting to high gas fees for priority confirmation.
A miner extractable value bot strategically bids higher gas fees to ensure the prioritization of its transactions. By analyzing these transactions, they actively seek profitable opportunities by leveraging strategies like sandwich attacks, front-running, arbitrage, flash loans, and liquidation. These tactics involve exploiting price differentials, transaction sequencing, and temporary liquidity fluctuations on decentralized exchanges.
- Monitor Mempool
MEV bots have seamless access to the mempool, a repository of pending transactions. They meticulously scrutinize transactions across various pools to pinpoint potential opportunities.
- Identify Opportunities
These bots conduct in-depth evaluations of pending transactions to identify lucrative prospects. The assessment primarily considers transaction types, associated gas fees, and processing time. With swift processing capabilities, they analyze this data in milliseconds to refine possibilities such as liquidation, arbitrage, and more.
- Execute Transaction
Upon identifying a viable transaction, the focus of an MEV trading bot shifts to uncovering profit-maximizing patterns. This is when bots leverage MEV strategies such as arbitrage, frontrunning, liquidations, flash loan, and sandwich attacks to enhance profits.
- Optimize Gas Price
MEV bots engage in strategic gas price bidding to secure prompt transaction inclusion in the upcoming block before the opportunity diminishes. By adeptly adjusting outbidding competitors and gas prices, they expedite transaction processing.
- Leverage Platforms
MEV bots frequently leverage platforms like Flashbots, offering advanced tools for direct transaction placement with miners. Such platforms may feature transaction monitoring dashboards, custom smart contracts, and algorithmic trading capabilities, enabling bypassing of the public mempool and mitigating the risk of being frontrun by other bots.
