My previous article covered the basics of MEV (Maximal Extractable Value). This article will cover the tactics used to extract MEV. Before that, let’s review the basics of MEV. MEV is a profit that searchers can earn by changing the order of transactions in the mempool (the waiting area for all queued transactions). The reason MEV exists is due to the publicity and general transparency of blockchain transactions. MEV was first discovered in 2014 (MEV exists in both POS and POW), and since then, many hundreds of millions have been extracted through MEV tactics. Now, let’s look at some of these tactics:

Sandwich Attack: A sandwich attack consists of two parts: Front-running and Back-running.

• Front-running: Searchers are the main players in extracting MEV. Typically, they use bots to scan the network for profitable opportunities. In Front-running, a profitable opportunity is one where a large transaction is queued. For example, a transaction is set to buy $1 million worth of Ethereum (a profitable transaction doesn’t necessarily have to be this large; it is all relative to the cryptocurrency). A searcher bot notices this transaction and then initiates a transaction as well but with higher gas fees, like buying $250,000 worth of Ethereum. Both of these transactions are currently in the mempool, but the transaction initiated by the searcher bot is verified first because validators earn money based on gas fees and the searcher bot’s transaction has higher gas fees. Based on supply and demand principles, the searcher bot’s transaction raises Ethereum prices, and when the $1 million transaction is verified, the buyer obtains less Ethereum than estimated yet Ethereum prices increase further. Therefore, the searcher bot obtains more Ethereum for their money and thus makes a profit.
• Back-running: Back-running is the second part of Sandwich Attacks. In Back-running, the searcher bot simply sells the cryptocurrency it bought in the Front-running stage. Due to supply and demand principles, they would have bought Ethereum for a lower price than it is currently worth, and selling it now would give them a profit.

Here is a quick example of a Sandwich Attack:

1. A searcher bot notices a profitable opportunity (a transaction for buying $1 million Ethereum)
2. The searcher bot initiates a transaction with higher gas fees and the transaction is processed (a transaction for $250,000 Ethereum)
3. The other transaction ($1 million Ethereum) is verified
4. The searcher bot sells their Ethereum for a profit

Dex Arbitrage: Dex Arbitrage is when searchers take advantage of the difference in price across different exchanges. This tactic works rather straightforwardly:

1. A searcher notices a discrepancy between different exchanges
2. The searcher buys from the lower-priced exchange
3. The searcher then sells it on the higher-priced exchange and makes a profit

Overall, Dex Arbitrage isn’t a malicious tactic; instead, it helps ensure that the prices across exchanges are the same. Dex Arbitrage is very competitive, though, and it has far smaller profits, as compared to Sandwich attacks.

Liquidation: In cryptocurrency, the concepts of lending and borrowing work similarly as they do with physical money. Collateral is required as a part of borrowing/lending. When a debt is liquidated, this collateral is open to anyone to buy at a discount and then to sell at a higher price for a profit. For example, someone borrows Ethereum and deposits Bitcoin as collateral. Suppose that Ethereum prices increase by 20%, then the transaction is liquidated and the Bitcoin deposited is open for anyone to buy.

All in all, MEV tactics can be both harmful and slightly positive (like Dex Arbitrage), yet they nevertheless affect the cryptocurrency network.

If you want to learn more, check out the links below:

What Is MEV (Maximal Extractable Value) in Crypto?

What Is Maximal Extractable Value (MEV), and How Does It Work?

Thank You for Reading

If you like this article, consider reading my other articles

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