Understanding MEV and Its Impact on DEX Traders

Detailed Instructions

Searchers use sophisticated bots to monitor the public mempool of networks like Ethereum, where pending transactions are broadcast before confirmation. The goal is to identify transactions that create arbitrage opportunities or liquidation events. For example, a large DEX swap on Uniswap V3 that significantly moves the price of an asset on one pool creates a price discrepancy with another pool or CEX. Bots parse transaction data to calculate potential profit, factoring in gas costs and slippage. They often target transactions with high slippage tolerance, as these indicate a user's willingness to pay more, creating a larger sandwich attack window.

• Sub-step 1: Monitor the Mempool: Use a node or service like Alchemy or QuickNode to stream pending transactions. Filter for transactions to specific DEX router addresses (e.g., Uniswap V3: 0xE592427A0AEce92De3Edee1F18E0157C05861564).
• Sub-step 2: Analyze Transaction Calldata: Decode the input data to understand the swap parameters, such as amountIn, amountOutMin, and path.
• Sub-step 3: Simulate Profitability: Run a local simulation using eth_call or a forked environment to check if sandwiching or arbitraging the transaction yields a net profit after ~0.3 ETH in gas.

Tip: Profitable opportunities often last for less than a second, requiring ultra-low latency connections to nodes and validators.

Detailed Instructions

Once a target transaction is identified, the searcher constructs a bundle of transactions to extract value. The most common method is the sandwich attack, which involves two transactions: a front-run and a back-run. The searcher must calculate the optimal amount of capital to use for the front-run to maximize profit without pushing the price beyond the victim's slippage tolerance. This requires precise modeling of the DEX's constant product formula (x * y = k). The bundle is then submitted to a block builder or relay via a private channel or a public marketplace like Flashbots Auction.

• Sub-step 1: Front-run Transaction: Create a swap transaction that executes before the victim's trade, buying the asset the victim is buying, which drives its price up.

solidityCopy
// Simplified intent: Swap 100 ETH for TOKEN before victim
router.swapExactETHForTokens{value: 100 ether}(
    minAmountOut,
    path,
    address(this),
    deadline
);

• Sub-step 2: Include Victim Transaction: The original user's swap is placed in the middle, now executing at a worse price.
• Sub-step 3: Back-run Transaction: Immediately sell the acquired tokens back in the same block, profiting from the inflated price caused by the victim's trade.

Tip: Bundles must be atomically valid; if any transaction fails, the entire bundle is rejected by the builder.

Detailed Instructions

To ensure their bundle is included in a block, searchers participate in a priority gas auction (PGA) or use a private relay like Flashbots. They submit their transaction bundle along with a bid (typically a portion of the expected MEV profit) to the block builder. Builders aggregate bundles from many searchers, constructing the most profitable block possible to propose to a validator. This process often occurs through a searcher-builder separation model. The bid is critical; too low, and the builder ignores it. Too high, and it erodes the searcher's profit. Builders use specialized software like mev-geth to simulate and validate bundles.

• Sub-step 1: Choose a Submission Endpoint: Send the JSON-RPC bundle to a relay URL. For example, to Flashbots:

bashCopy
curl -X POST https://relay.flashbots.net \
  -H "Content-Type: application/json" \
  -d '{"jsonrpc":"2.0","id":1,"method":"eth_sendBundle","params":[{...}]}'

• Sub-step 2: Set the Bid: Specify the minTimestamp and maxTimestamp for block eligibility and the revertible flag. The bid is the priority fee sent to the validator.
• Sub-step 3: Monitor Inclusion: Track the bundle status. If not included in the target block, the searcher may need to increase the bid and resubmit.

Tip: Since The Merge, over 90% of Ethereum MEV flows through PBS (Proposer-Builder Separation), making relays essential.

Detailed Instructions

When a validator proposes a block containing the MEV bundle, the transactions are executed in the specified order. The sandwich attack is completed within a single block (approx. 12 seconds on Ethereum). The victim's swap suffers from maximum extractable value (MEV) loss, receiving fewer tokens than they would have in a fair, un-front-run execution. This loss is quantifiable as the difference between the expected execution price and the actual price after the attack, often amounting to 10-50+ basis points of the trade size. The searcher's profit is the net difference from their two swaps, minus gas and bid costs. This activity increases network congestion and gas prices for all users and can lead to failed transactions if the victim's slippage tolerance is exceeded.

• Sub-step 1: Block Finalization: The validator adds the block to the chain. The searcher's front-run and back-run transactions are confirmed.
• Sub-step 2: Calculate Trader's Loss: The victim's transaction hash can be analyzed on a block explorer. The price impact can be compared to the market price at the time using historical DEX data.
• Sub-step 3: Searcher's Profit Realization: The searcher's contract now holds the profit in ETH. They must account for all costs:
  • Gas for 3 transactions (~0.3 ETH in high congestion).
  • Bid payment to the block builder/validator (e.g., 0.1 ETH).
  • Any protocol fees on the DEX.

Tip: Traders can mitigate this by using DEX aggregators with private RPCs (like Flashbots Protect), setting lower slippage, or trading on L2s with nascent MEV ecosystems.