Ethereum Trading Bot Strategy ‘Extracted’ $107M in 30 Days, Research Suggests

Ethereum Trading Bot Strategy ‘Extracted’ $107M in 30 Days, Research Suggests

Trading bots preying on perceived flaws in Ethereum’s infrastructure have “extracted” at least $107 million in the past 30 days, according to new research.

Popularly referred to as Miner Extracted Value (MEV), the arbitrage strategy sees bots identify and target trades waiting in Ethereum mempools. The bots can use a few observed techniques to profit from the targeted trade. For one, a bot will find a profitable trade waiting in the mempool. Then it will copy that trade and up the gas price for its transaction. That way, a miner will package its copy trade before the original can go through.

“After scraping the Ethereum blockchain starting from the first block of 2020 (9193266), we’ve found a total of at least $314M worth (~540k ETH) of Extracted MEV since Jan 1st 2020,” a Medium article from research group Flashbots states.

Related: Bitcoin Retakes $50K as Powell Eases Market Jitters, Bond Yields Drop

The technique netted at least $57 million or 47,600 ETH in January alone and $107 million in the past thirty days, the Flashbots data shows. For example, this trade Flashbots points to continuously re-bid on a trade so as to protect it from trading bots that noticed it. The original trader was successful, but at the cost of the lurking bots wasting gas on a failed transaction and increasing congestion on the Ethereum blockchain.

One point of clarification about the data, Flashbots Alex Obadia told CoinDesk after publication of this article, is that organizing the numbers correctly remains difficult – it’s more art than science.

“The value we displayed is not from mempool snipers only,” Obadia said. “But anyone looking to perform liquidations or arbitrage, it is hard to identify whether an arbitrage trade was seized by a sender that found it in the mempool vs just found the price inefficiency and fired the trade.”

Trading bots create ‘negative externalities’ for Ethereum

Story continues

That second point is more important than a first look may convey. Failed transactions generally increase the average transaction cost on-chain – a sore spot for Ethereum users who have suffered under $20-$30 average transaction fees – in addition to “bloating” the Ethereum by leaving traces of the failed transaction on the blockchain’s state. In other words, MEV creates negative externalities for Ethereum (or any smart contract blockchain).

Related: US House Subpanel to Look at Crypto as Part of Examination of How Domestic Terrorism Is Funded

It’s important to note that MEV is not always performed by miners but mainly by trading bots often run by market-making firms. In fact, there’s little evidence to suggest Ethereum miners have employed MEV techniques to date. Some Ethereum mining pools have even built custom networks to deter front running – a form of MEV – such as SparkPool’s Taichi Network.

Flashbots’ dataset is only a rough estimate of MEV, the research group warned, as identifying arbitrage bots requires active on-chain management. Flashbots said the group continues to update its methodology to better reflect real MEV values.

Update (February 23, 21:00 UTC): A comment from Flashbots was included after publication.

Related Stories

Are you a robot?

Why did this happen?

Please make sure your browser supports JavaScript and cookies and that you are not blocking them from loading. For more information you can review our Terms of Service and Cookie Policy.

Bitcoin and Ethereum See Major Weekend Corrections After Hitting New ATHs

The oversell came soon after veteran trader, Peter Brandt, hinted that BTC could peak at $200k in a recent tweet. However, he also said that it is likely that the coin’s price will go through a deep correction before hitting this price. It is possible that this was the correction he was expecting to see, although it is just as likely that this is only a beginning.

Meanwhile, Elon Musk once again spoke about cryptocurrencies on Twitter, this time in response to Changpeng Zhao. In a recent interview, Zhao noted that he is surprised that Musk is pushing Dogecoin so much, but that he is, ultimately, free to like whatever he wants. However, he did note that it was interesting that Musk’s company, Tesla, bought $1.5 billion of BTC and not DOGE.

To that, Musk replied that Tesla’s action is not reflective of his opinion. Having Bitcoin is a simply less dumb form of liquidity than cash, as he stated.

He did point out that he is an engineer, and not an investor. Later on, in conversation with Peter Schiff, Musk also mentioned in a different context that Bitcoin and Ethereum ‘do seem high,’ potentially hinting that he expects a correction.