What are MEV bots, and how do they make money?
As decentralized finance (DeFi) continues to evolve, a new breed of algorithmic traders has emerged: MEV bots. MEV, or Miner Extractable Value (now more broadly referred to as Maximal Extractable Value), has become a critical concept in understanding the economics of blockchain networks, particularly Ethereum. These bots exploit the mechanics of block production to extract profits, often in ways invisible to the average DeFi user.
This article explores what MEV bots are, how they operate, the strategies they use to earn profits, and the risks they pose to the DeFi ecosystem.
What Is MEV?
MEV refers to the value that can be extracted from a blockchain transaction beyond standard fees. This extraction is done by reordering, inserting, or censoring transactions before they are confirmed on-chain.
MEV is a hidden tax on all types of Ethereum transactions. That means any time you want to transact in DeFi: from buying or selling an NFT, lending tokens to a liquidity pool, or swapping one token for another, a group of opportunistic users known as "searchers" have the opportunity to see your trade, and manipulate the criteria surrounding your trade to ensure they make profit, at your expense.
There are lots of different ways MEV can take place on Ethereum, which we'll explore further down in the article. But for now, it's important to understand the mechanics of MEV, and their presence on many chains like Ethereum.
What Are MEV Bots?
MEV bots are automated programs - or "searchers" - designed to scan the mempool for profitable opportunities and execute transactions that maximize extractable value. These bots typically run with low latency, operating within milliseconds to front-run, back-run, or sandwich user transactions.
They are often connected directly to validators or use private relay networks like Flashbots to gain preferential access to blockspace and avoid detection or retaliation.
How MEV Bots Operate
MEV bots scan the mempool for patterns that can be exploited. Once a profitable transaction is identified, the bot crafts a bundle of transactions that captures the value and submits it for inclusion in the next block.
Bots are designed with specialized algorithms capable of:
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Monitoring decentralized exchanges (DEXs) for price discrepancies.
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Simulating transaction outcomes using blockchain state.
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Submitting arbitrage, liquidation, or manipulation transactions with precision timing.
Many MEV bots use private relays like Flashbots, which provide a way to send transaction bundles directly to validators without exposing them to the public mempool.
MEV Bot Strategies
1. Arbitrage
MEV arbitrage bots identify and exploit price differences for the same asset across different decentralized exchanges or DEXes. This is also known as loss versus rebalancing. These bots look for a token price to be higher or lower on different exchanges, and then exploit the price difference between the two. Many liquidity providers haven't even heard of LVR, but it costs them 5-7% of their liquidity, resulting in hundreds of millions lost each year. In fact, when accounting for LVR, many of the largest liquidity pools are not profitable for LPs at all. Learn more about LVR.
2. Sandwich Attacks
Sandwich attacks occur when a user's transaction gets trapped, or "sandwiched," between two hostile transactions - one before and one after. As a result, the original transaction executes at a much higher price than necessary, leading to an inflated price for the original trader and a profit for the malicious trader placing the two extra trades (known as a "searcher"). Learn more about sandwich attacks.
3. Liquidation Hunting
Liquidation bots specialise in monitoring lending platforms looking for undercollateralized loans. If a borrower's collateral falls below a required threshold, these bots execute liquidation transactions to claim rewards.
4. Backrunning
Backrunning is a specific type of MEV (Maximal Extractable Value) which causes some traders to miss out on potential profit opportunities from their trades. In practice, backrunning involves strategically executing a transaction immediately after another, high-value transaction. By doing this, the backrunning transaction capitalizes on the arbitrage opportunity left over from the price impact of the initial transaction. Learn more about backrunning.
Key Characteristics of MEV Bots
1. Gas Fee Optimization
A fundamental challenge for MEV bots is managing gas fees. To successfully position a profitable transaction, a bot must bid just enough gas to be included quickly, but not so much that it eats into its margins. If it underbids, the opportunity may be lost to a faster competitor. The constant push-pull between speed and efficiency is critical in highly competitive mempool environments.
2. Smart Contract Intelligence
Modern MEV bots aren't just reactive, they're analytical. Using complex algorithms, these bots dive deep into smart contracts, evaluating liquidity pools, token behaviors, and execution logic. They can assess the feasibility and profitability of complex trades across multiple contracts, even in split-second windows.
3. Autonomous Execution
Speed is everything in MEV. These bots are designed to operate independently, constantly monitoring conditions, identifying patterns, and executing trades without human intervention. This autonomy enables them to react instantly when profit windows appear, making decisions at a speed no manual trader could match.
4. Mempool Surveillance
MEV bots are essentially mempool watchers. They observe unconfirmed transactions, analyze them for profitable setups, and react accordingly. Depending on the strategy, a bot may look for large trades it can sandwich, vulnerable loans it can liquidate, or price discrepancies it can exploit through arbitrage. Their ability to see - and act on - these pending transactions is what makes them so effective.
Real-World Examples of MEV in Action
One of the most well-known MEV incidents involved a bot that earned more than $1 million in ETH from reproducing and front-running an incoming hack in the Curve stablepools. This event showcased not only the profitability of MEV but also its potential to destabilize markets when unchecked.
Since 2020, crypto users have lost more than $1.8 billion to malicious Maximal Extractable Value (MEV) extraction - not through dramatic hacks or bold heists, but through systematic exploitation happening in plain sight.
Flashbots, a research and development organization, has brought some transparency to MEV practices by facilitating ethical MEV extraction through private relays and promoting open dialogue.
Risks and Criticism of MEV Bots
While MEV bots create efficiencies for some market participants, they also introduce significant risks:
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Front-running and unfair advantage: MEV bots can effectively "steal" value from unsuspecting users by exploiting transaction ordering.
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Network congestion: Intense MEV competition can drive up gas prices and clog the network.
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Centralization risks: Reliance on private relays and preferential validator access may contradict the decentralized ethos of blockchain.
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Volatility and slippage: Sandwich attacks distort prices and increase slippage for users.
Mitigating MEV Risks
Beating MEV bots on your own can be tricky, but there are many avenues you can use to protect yourself from MEV Bots.
Reduce Slippage on Ethereum
The most basic defense against MEV is setting a low slippage tolerance. Slippage tolerance is essentially how much variation in the final price you receive you are willing to accept.
Transactions with a lower slippage tolerance give MEV bots less room to exploit trades. For users who aren't utilizing any other MEV protection tools, setting a lower slippage tolerance can be a good first line of defense, however it's by no means a complete solution.
Setting the slippage tolerance too low often results in failed transactions. Even with optimal slippage, MEV bots may still be able to extract value from your trades.
So sometimes we need to do more than adjust our slippage.
Use a Custom RPC Endpoint on Ethereum
A better protection method is to install an MEV protection RPC endpoint. A Remote Procedure Call (RPC) endpoint is an intermediate layer that routes transactions from a user's wallet to the blockchain itself.
One of the most popular specialized RPC endpoints is MEV Blocker.
As the name suggests, MEV Blocker provides protection against MEV across all of Ethereum. The RPC works by managing a permissionless network of searchers and hiding transactions from the public mempool.
These searchers cannot frontrun or sandwich user transactions.
Instead, they capture value through backrunning. Anytime a searcher backruns a user's transaction, the searcher keeps up to 10% of the value and sends the other 90% back to the user as a rebate.
The best solution? Use an MEV-Protected DEX
CoW Swap is a meta DEX aggregator that finds the best prices for trades and provides comprehensive MEV protection. The protocol uses a unique trading mechanism that relies on batch auctions and intents to achieve the best outcomes for users.
Thanks to a powerful combination of delegated trade execution, batch auctions, and protected transaction flow through MEV Blocker, CoW Swap users benefit from thorough MEV protection on all trades.
Conclusion: The Dual Nature of MEV Bots
MEV bots occupy a fascinating and controversial space within DeFi. They represent the cutting edge of blockchain innovation, showcasing what's possible when technical sophistication meets economic incentive. But their existence also raises ethical and structural questions about fairness, transparency, and the future of decentralized markets.
As DeFi matures, understanding MEV - and the bots that exploit it - is crucial for anyone building or trading on open financial protocols. Whether seen as opportunistic predators or necessary arbitrageurs, MEV bots are here to stay. The real question is how we, as a community, design systems that encourage ethical behavior while preserving the integrity of decentralized finance.
Interested in learning about MEV and what measures you can deploy to help keep yourself protected? Check out the below.
