The purpose behind the development of blockchain technology was to make monetary transactions more open and decentralized. Despite this, new difficulties have arisen as a result of the development of the technology. The proliferation of MEV bots, for example, is one of these issues. These bots have the ability to manipulate blockchain transactions in order to maximize profits, which may have a detrimental impact on the integrity and fairness of decentralized exchanges.
What Are MEV Bots?
MEV, or Maximum Extractable Value, refers to the potential earnings obtained by manipulating transactions within a blockchain block. MEV bots are types of automated bots that have the ability to influence blockchain transactions for the purpose of increasing profits. They are able to do this by using the manner in which miners on the blockchain handle the processing of transactions. Miners have the ability to prioritize some transactions over others depending on the fees that are connected with each transaction.
MEV bots have the ability to go ahead in the transaction queue by either front-running or back-running transactions. This gives them the opportunity to benefit from price swings that may occur as a result of the original transaction.
There are various types of MEV in existence:
- Sovereign MEV: These ones involve using one’s position of power within the blockchain network. These MEVs also manipulate transaction orders for personal gain. Miner’s prioritize these types of MEVs for their own transactions or include certain transactions in exchange for compensation.
- Internal MEV: These types of MEVs allow application devs to establish rules for capturing MEV as they also define acceptable methods to extract value within their applications.
- CeFi-DeFi MEVs: CeFi-DeFi MEVs exploit differences between centralized exchanges and Decentralized exchanges. This type also utilizes arbitrage opportunities to extract value as they take advantage of variations in pricing or liquidity.
- Interchain MEVs: Interchain MEVs are utilized by traders to analyze cross-blockchain data to profit from asset exchanges. They involve leveraging bridges or decentralized exchanges (DEX) to exchange assets between blockchains. They also capitalize on discrepancies in asset prices or availability.
When a MEV bot successfully intercepts a transaction and then immediately sends a new transaction with a higher fee before the original transaction is verified, this is an example of front-running. In this way, the bot is able to secure a better place in the transaction queue and is more likely to profit from price fluctuations that may occur as a result of the initial transaction.
How Do MEV Bots Work?
MEV bots find potentially lucrative possibilities by using sophisticated algorithms and watching the activity on the network in real time. Bots are able to use pending transactions to their advantage if they first analyze such transactions. MEV bots have a substantial advantage in the cutthroat and profitable world of blockchain transactions because of their capacity to respond quickly and proactively to emerging situations.
MEV bots have the potential to undermine the honesty and reliability of decentralized marketplaces, hence undermining the users’ faith in blockchain-based infrastructure. Concerns about market manipulation, lower liquidity, and decreased involvement by ordinary investors, who may be at a disadvantage as a result of the techniques adopted by MEV bots, have been sparked as a result of the existence of MEV bots.
How to avoid being front-runned by mev bots
To avoid being front-runned by MEV bots, one effective solution is to utilize the on-platform aggregator provided by DEXTools.io. This aggregator offers protection against MEV bots for a small fee (0.3%). By utilizing this service on the DEXTools platform, users are shielded from these types of bots, preventing immediate losses upon opening a position due to their presence.
This protection allows users to trade with greater confidence, knowing that their transactions are less likely to be manipulated by MEV bots. By leveraging the services provided by DEXTools and other similar platforms, traders can mitigate the risks associated with MEV manipulation and ensure a more secure and equitable trading experience in the decentralized finance ecosystem.
Implementing MEV-resistant designs that reduce the potential for manipulation is one method that blockchain developers and academics are currently exploring as a solution to alleviate the harmful impacts of MEV bots. This comes as blockchain developers and researchers continue to aggressively investigate solutions.
Additionally, protocols such as Flashbots have been implemented in order to give users with a platform that is more transparent and egalitarian while also reducing the power that MEV bots have on the transaction process. Transactions on blockchains may be seen as transparent and decentralized, however MEV bots provide a huge obstacle to this ideal.
The blockchain community can work toward a more secure and egalitarian future for decentralized finance if members of the community understand how MEV bots operate and if members of the community actively build countermeasures.