This article will discuss the topic of MEV bots, which are a series of individuals that leverage powerful hardware and specially designed techniques to make a profit in the block production sector in the Ethereum blockchain.
This is a very complex topic, and a first introduction to the topic of block validation in Ethereum is again necessary to be able to understand what MEV bots are and why they are worth talking about.
Full details below.
A first premise: the role of the validator and the researchers
As expected, before talking about MEV bots on Ethereum, it is essential to have a 360-degree view of how block validation and publication works on the blockchain conceived by Vitalik Buterin.
While it is understood that MEV techniques can also be used on other networks, in this article we will focus exclusively on Ethereum string so as not to create confusion.
On it, all transactions are initially grouped into the memory poolwaiting to be grouped and added to a block, before actually being published.
Until then, transactions remain pending and crypto assets are not made available to the user who is to receive them.
The task of producing the final block falls to the validator (with proof of work it was the miner) who can independently choose which transactions to include first.
At this point it is IMPORTANT to understand that the validator cipher benefit from this activity in two ways: the block reward (in the case of Ethereum, 2 ETH per block) and the Issuance fees users who wish to have execution priority.
It is therefore in the validator's interest to choose the transactions that “earn the most” and create a block that rewards them the most in terms of transmission fees.
Consider that sometimes these exceed the block reward amount.
The essence of EVMwhich we will discuss in more detail in the next section, is based on this very conceptnamely the fact that the block producer can sort transactions in a manner block at will, by having them executed according to a certain chronology which will then have certain effects on the market.
Another very important character in this process is that of researchersthat is to say the people who provide a “package” to the validator with a possible classification of the transactions, in order to simplify their work.
It's already a predefined transaction combination which validators can leverage to earn as much TX fees as possible, while rewarding researchers with a commission for their work.
However, the gain for researchers does not lie so much in the commission to which they are entitled as in the effects that are caused when a validator chooses to publish the proposed block version.
In fact, by doing so, the researcher can take advantage of arbitrage opportunities in the market. DEX by choosing to order transactions in such a way as to create slippage in the price of an asset and take advantage of this price difference.
Then there are other techniques that researchers and validators can exploit, sometimes trying to to rip off by following exclusively the search for profit
How Ethereum MEV bots work in detail and the value creation process
After the initial preamble, we can finally talk about MEV robots on Ethereum.
The term “MEV” refers to “Maximum extractable value», which is this set of techniques which seek to maximize an individual's profit (whether a validator, researcher, or relayer) by choosing to include, omit, or rearrange certain transactions in a blockchain.
Since the Ethereum blockchain is subject to the use of smart contracts and is full of decentralized markets ranging from simple DEX to lending platforms, we understand that choose order with which several transactions can be executed completely changes the final resultespecially when large quantities of cryptocurrency are involved.
It is not always the validator who wins based on the sorting of txs in a block: although that party wins the block reward and tx user fees, sometimes other players benefit, leading to profits of several million dollars, even at the expense of the validators themselves.
It's good to understand that the person who exploits these EVM techniques is not just any userbut an expert who uses very complex hardware and specialized software to identify the best strategy and implement it in an automated way.
We can summarize all EVM techniques in the following cases:
Let us try to delve deeper into the second case, i.e. spike attacks: By leveraging the capabilities of individuals involved in bulk publishing, it is possible to anticipate a large purchase order (previously left waiting in the mempool) to create a price increase of an asset, and always exploit the logic of the order of transactions to place a sell order in the next moment and sell the same asset at a higher price than the original price.
This is more specifically called a sandwich attack when a buy transaction is placed before a large order (for example, a purchase of 1,000 ETH) and a sell transaction is placed immediately after.
The slip caused by the whale the order represents the benefit of the MEV strategy.
The world of EVMs is extremely complexand the examples we have provided represent just the tip of the iceberg of a much more complex set of strategies and techniques that have been carefully designed to attempt to make a profit.
In any case, it is important to remember that when a validator or researcher takes advantage of such a transaction, for example by “artificially” creating price slippage on a DEX, there is always a counterparty who loses the same dollar value.
Here too, as is the case in trade, the game is zero sum: When it comes to money, there are no ethics.
The advantages and disadvantages of MEV techniques used by bots on Ethereum
You're probably wondering what the benefit is of having a structure of bots on Ethereum that exploit MEV strategies, sometimes playing dirty, to get rich behind someone else's back simply by managing tx sorting in a blockchain.
There are different schools of thought who praise or criticize the essence of MEVs and these strategies.
Proponents of MEV bots primarily believe that this type of on-chain activity and competition promotes asset price stability In Challenge protocols and makes lending platforms less dangerous.
It is precisely because of MEV robots that Sushiswap and Uniswapfor example, the price of ETH is more or less always the same and no major variation occurs this would harm trading on these protocols.
In fact, arbitrage opportunities are also and mainly generated by MEV strategies, but they are in reality operated and concluded within the same block or a few thousandths of a second later.
On the other hand, those who oppose these maximum value extraction techniques argue that the user experience is significantly more unpleasant given the gas price increase caused by MEVs on Ethereum.
In the fight for tax sorting to be preferred, individuals involved in this process increase transmission fees to the point of force even simple users who want to create a simple cryptocurrency Transfer to pay disproportionate fees.
Additionally, some whales that transact buying or selling crypto on-chain could suffer more than normal slip if it was targeted by an MEV, which for its part would gain the difference in price caused.
In conclusion, MEV strategies represent an interesting solution overview of Ethereum blockchain architecture and the roles inherent to the blockchain organization.
To date, this set of techniques is viewed favorably by the Ethereum community, but as the ecosystem is constantly evolving, insiders are constantly monitoring the situation to prevent MEVs from looming. consensus and network integritywhich has always been preserved until now.
We will see what the future of these robots will be on Ethereum and if Vitalik and its own foundation will allow them to evolve or create solutions to destroy them.