CoinGecko’s second-quarter 2023 report revealed that MEV bots for algorithmic trading increased profits by 11% on a quarterly basis, despite an 87% drop in transaction volume. On page 21 of the report is the slide devoted to MEVs (Maximal Extractable Value), where it is evident that May was a decidedly important month in this respect.
Summary
The profits of MEV bots in Q2
Indeed, in May a total of $14 million in profits was recorded, of which $9 million was from so-called sandwich attackers, and the rest from arbitrage and liquidations.
It is worth noting that in March it had been about 18, so May was not the best month of the year. However, the year had started with less than 3 million in January and 5 in February, and the first quarter had stopped at $24.5 million in profits.
By contrast, in April it was 7 and in June 5, bringing the total value for the quarter to $27.2 million.
What made May a very successful month for MEV bots was memecoins such as PEPE, which is also why profits then fell in June.
The most curious thing is that at the same time volumes plummeted
It was really a sharp contraction of trading volumes on DEXs, resulting in the collapse of volumes of MEV bots as well.
It went from $44 billion at the end of March to only $6 billion at the end of June, a drop of 87%.
It is worth mentioning that March was a peculiar month, since the total monthly volumes in January had been 10 billion, and 14 in February. In March, on the other hand, they had jumped to 44 billion, but by April they were back down to 7. This is precisely why the 87% drop should be taken with caution.
Since profits have increased in the face of reduced volumes, it means that the average profit per trade has increased. This is mainly true for sandwich attackers, as quarterly profits increased from $10 million to $17 million.
How do these complex techniques work?
MEV bots are bots that use powerful hardware and special techniques to make profits from block production activity on the Ethereum blockchain and on other networks.Â
Block validators make money from both block rewards and user fees, and thus they primarily choose to execute transactions with higher fees.
These selections that effectively prioritize some transactions over others create arbitrage opportunities on DEXs, as the order in which transactions are executed on decentralized exchanges can create price slippage.
It is important not to forget that these are public transactions, so anyone can analyze them even before they are executed.
These are therefore Maximum Extractable Value (hence the acronym MEV) techniques that seek to maximize profit by choosing to include, omit, or reorder certain transactions in a block.
Clearly, these are very complex and specialized techniques that do not always benefit block producers.
For instance, the sandwich attacks that produced so much profit in the second quarter of 2023 are techniques based on the inclusion of a buy transaction before a large order is executed by some whale, then followed by a second sell transaction just after its execution.
Indeed, when orders with very large numbers are executed on DEXs these produce price slippage, and by knowing in advance when they will occur it is possible to very quickly execute purchases followed by sales to take advantage of such price slippage.
