Maximal Extractable Value (MEV) bots are increasingly becoming popular – especially on the Ethereum network. Put simply, MEV bots are algorithms that determine which transactions should be prioritized. This enables validators and MEV bot creators to autonomously generate profits.
Other strategies are also utilized, such as front-running and liquidation mining. This beginner’s guide explains everything there is to know about MEV bots, including how they work, the different strategies used, and the required step-by-step process.
What is MEV in Crypto?
Let’s start with the absolute basics; What is a MEV bot? MEV – or Maximal Extractable Value, are automated crypto bots that make money for their creators. There are many different strategies employed, although most revolve around transaction reordering. So, when transactions are sent on the Ethereum blockchain, they initially sit pending in the ‘mempool’.
This is until the respective block of transactions is confirmed by the proof-of-stake validator. However, the order in which transactions are processed can be manipulated by the MEV bot. It’s a win-win situation for the bot creator and network validators. This is because MEV bots can prioritize transactions with the highest fees.
Meaning – the validator makes more money. In turn, the MEV bot creator will be paid a commission. Additionally, MEV bots also operate on decentralized exchanges. One of the most common strategies is front-running. This means bots secure a favorable entry price based on pending orders, allowing them to profit from the immediate price increase or decrease once executed.
Other common methods include back-running, liquidation, and arbitrage trading bot strategies. MEV bots are also increasingly being used to secure flash loans. Crucially, questions remain about the ethics of MEV bots. After all, they have an unfair advantage over regular market participants. This should be considered before you proceed.
How Do MEV Bots Work?
Let’s take a closer look at how MEV bots work. This will ensure you have a firm understanding of the fundamentals.
Transaction Monitoring
MEV bots operate 24 hours per day, 7 days per week. They monitor every single transaction that goes through the Ethereum network. As mentioned, pending transactions are initially sent to the mempool. Naturally, the mempool contains a significant number of transactions at any given time.
This covers the entire Ethereum ecosystem, meaning transactions could be associated with thousands of different projects. This could include smart contracts deployed from meme coins, play-to-earn games, decentralized finance platforms, and NFT transfers.
As such, MEV bots are designed with highly advanced algorithms. Unless you’re proficient in a suitable programming language, learning how to make a MEV bot in crypto will be challenging. More on this later.
MEV Opportunity Detection
Transaction monitoring is the first segment undertaken by the MEV bot. Simultaneously, the bot analyzes transaction blocks to find profit-making opportunities. For example, at their core, MEV bots were originally designed to profit from transaction reordering. This means prioritizing Ethereum transactions with the highest fees.
This is because the Ethereum network is limited in how many transactions it can process per block. Therefore, MEV bots exist to…
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