MEV Bot Development - Working Module, Strategies, Features, and Benefits

$1 Million in profits executed in a single day! Nah, we are not talking about crypto trading bots. According to Eigenphi's data, it was done by Ethereum MEV bots from 11,640 transactions. With trillions of dollars in market cap, billions of dollars in transactions, and millions of traders putting orders, Cryptocurrency is one of the biggest and most profitable markets to look for in this century.

As The Global Decentralized Finance (DeFi) market is on its way to attaining $48.02 billion by 2031, MEV Bot Development will be one of the top choices to make profits from this industry. If you’re not aware of this, don’t worry we got you.

In this blog, we will learn about what is an MEV bot, how it works, and what are the features, benefits, and strategies it offers. Now wait, I have another interesting note about MEV bots. These are originally called Miner Extractable Value, then it was changed to Maximal Extractable Value when Ethereum switched from proof-of-work to proof-of-stake in 2022.

What is MEV Bot & Its Development

An MEV (Maximal Extractable Value) bot is a program that operates on blockchain networks like Ethereum to profit from the way transactions are ordered and executed. MEV refers to the potential profit that a miner or validator can earn by changing the order of transactions, adding transactions, or leaving some out when they are creating a new block. These bots are automated scripts that look for ways to make profits and quickly carry out trades.

MEV bots simply look for transactions that can be used for profit. It includes activities like arbitrage (buying low and selling high between different markets), front-running (placing a transaction just before another to benefit from price changes), or sandwich attacks (buying and selling in a way that manipulates the price).

For example, imagine a transaction on a blockchain to buy a large amount of cryptocurrency, which will increase its price. An MEV bot detects this and places a buy order just before the transaction (front-running), then sells right after the transaction when the price has increased known as a sandwich attack. This earns the bot a quick profit.

MEV bot development has seen many upgrades with time just like blockchain technology. Algorithms, real-time data analytics, and flash bots took MEV bots to the next level.

The MEV Bots that Shook the Industry

MEV bots made headlines in the DeFi industry because of the decentralized social media platform named Friend.tech. According to data compiled by Tom Wan, a research analyst at 21Co, using Dune Analytics, a total of 121 automated bots successfully acquired more than 21,800 Keys. It results in profits of $2 million in just two weeks.

These Maximal Extractable Bots used a strategy where they purchase newly registered profiles at a low cost and then sell them for a higher price. The activity of these bots was particularly notable on August 21, when the number of transactions increased to 500,000. Additional data indicates that the total trading volume on Friend.tech has reached 45,495.9 ETH, valued at over $70 million. Still, have questions on what these MEV bot developers are capable of.

How does an MEV Bot Work?

Still confused, What MEV bots are? In simple words, MEV is the extra profit that miners can earn by changing the order of transactions in a block. MEV bots check the mempool, which is the collection of pending transactions, to find chances where they can profit. By submitting their transactions with higher gas fees or rearranging the order of transactions, MEV bots can make sure their trades get processed first.  

Ethereum is the main choice for MEV bots because of its smart contract features and more complex transactions compared to Bitcoin. Bitcoin mainly acts as a store of value, with simpler transactions, while Ethereum has a large DeFi ecosystem.

Gas fees are very important for how MEV bots operate. MEV bots often set higher gas fees to make their transaction happen first. It encourages miners to add their transactions to the next block before others. This aggressive bidding for gas fees can raise the costs of transactions for regular users, which may lead to slower network performance. This makes the topic of MEV a debated issue in the blockchain community.

Main Features of an MEV Bot

• Mempool Monitoring: MEV bots constantly watch the mempool, which is where unconfirmed transactions wait to be added to the blockchain.

• Transaction Priority and Gas Bidding: MEV bots often set higher gas fees than regular users to make their transactions a priority. This feature is important for increasing the profits it makes.

• Arbitrage: MEV bots can do arbitrage trading, as they buy an asset at a lower price on one exchange and sell it at a higher price on another exchange.  

• Smart Contract Interaction: Many MEV bots can work with different smart contracts on the Ethereum blockchain.  

• Risk Management and Strategy Optimization: Advanced MEV bots use risk management techniques and improve their trading strategies based on what is happening in the market.

Types of Strategies that MEV Bots Use

• Front-Running: In this strategy, the bot sees a pending transaction in the mempool that could change the market price, like a big buy order. The bot then quickly places its buy order with a higher gas fee so its transaction gets processed first. After the large order goes through and raises the price, the bot can sell its tokens for a profit.

• Back-Running: This strategy is similar to front-running but happens after a big transaction has already been completed. An MEV bot watches for large trades that are likely to affect prices and places its orders right after those trades to benefit from the price changes.

• Arbitrage: This strategy looks for price differences for the same asset on different exchanges. If a token is cheaper on one decentralized exchange (DEX) than another, an MEV bot can buy it at a lower price and sell it at a higher price, making a profit from the difference.

• Liquidation: Many DeFi platforms have a feature that users to borrow assets using collateral. If the value of the collateral drops too low, it can be liquidated. MEV bots keep an eye on these positions and quickly execute liquidation transactions to earn a profit from the fees or discounts when the collateral is sold.

• Token Swap Optimization: MEV bots can improve token swaps by finding the best ways to trade assets across multiple DEXs. By looking at liquidity pools and transaction costs, they can reduce slippage and increase profit when making trades confirming users get the best rates possible.

Conclusion

MEV, Arbitrage, Market-Making, Flash Loan, Scalping, or Grid - any trading strategy you name it. It all came due to the high volatility of the cryptocurrency market. Each crypto trading bot development has different approaches towards the market. Then what makes MEV bot development unique? Because it extracts value from decentralized finance directly to increase profits.

Get a Free Consultation