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Exploring MEV Scams In The DeFi Space: What Are They And How To Avoid Them?

Extracting MEV is a great way to make the most of blockchain networks and decentralized AI trading. MEV bots can help you profit from arbitrage and strategically insert transactions to your benefit. While it’s cool to be on the profiting end of MEV strategies, being on the receiving end of blockchain exploits can be frustrating.

Exploring MEV Scams in The DeFi Space - Header Picture
Exploring MEV Scams in The DeFi Space – Header Picture

In this article, we’ll explore how MEV bots are used with malicious intent, the various types of MEV scams, and how they affect individual users and the blockchain. By the end of this article, you should have enough information to navigate this problem.


What is an MEV Bot Scam?

Scam Bot - AI generated
Scam Bot – AI generated

An MEV bot scam refers to using software programs or tools, MEV bots, to manipulate transaction orders on blockchain networks, such as Solana and Ethereum, to generate extra revenue in a way that other users are exploited. It can also refer to bot frauds targeted towards unsuspecting MEV bot users. 

Typically, MEV, or Maximal Extraction Value, is supposed to be a good thing. It refers to the maximum profit a blockchain validator or miner can make from reordering transactions, which differs from the typical fees they gain from transactions.

Since extracting MEV from blockchain networks requires high speed and efficiency, automated software programs called MEV bots are used to reorder these transactions. The bots monitor the mempool for large buy and sell orders that will likely influence the token’s price and insert their own transactions before or after them to make a profit.

There are different MEV strategies MEV bots employ. They include front-running, backrunning, sandwiching, arbitrage, liquidation, and flash loans. While you can a profit from executing these strategies, when you perform them maliciously, you exploit other blockchain users, making them pay higher fees and experience longer transaction times.

Let’s discuss the different kinds of MEV scams below.


Types of MEV Scams

There are several different kinds of MEV scams, all of which involve MEV bots. MEV scams either exist as maliciously executed strategies or fake MEV bots that take advantage of their users. These scams include front-running, sandwiching, liquidation, and fake MEV bot scams.

Front-running scams

MEV bots typically scan the mempool for large transactions that can cause a significant spike in the price of a token. Once they identify one, typically a buy order, they copy the exact order and use a higher gas fee to ensure their transaction gets executed first. This is called front-running and it slightly increases the token’s price, causing the other user to experience a slight loss. 

For instance, if a user wants 1 ETH worth of a newly listed token, it amounts to 200 tokens. An MEV bot can first insert its transaction in the order block using a higher gas fee. Once the transaction is completed, the token’s value rises such that 200 tokens now cost 1.1 ETH. The bot can sell the tokens to make a profit of 0.1 ETH.

This is good for the bot, but bad for the user with the original order, who has to pay more fees for the same token they could have bought at a lower price a few seconds ago.

Sandwiching scams

Sandwiching is another exploitative MEV scam in decentralized AI trading. It combines front-running and back-running for maximum profits. In sandwiching, The MEV bot typically first scans the mempool for a significant transaction and copies the exact order using a higher gas fee. This first transaction aims to boost the token’s price to a reasonable degree.

An example of a sandwich attack through a step-by-step example by cow swap
An example of a sandwich attack through a step-by-step example by cow swap

It places the original transaction next on the order block, which, when executed, will increase the token’s value even further. It then places a sell order after that transaction, profiting from the price hike caused by the two transactions.

The sandwiched order suffers because it’ll have to pay more for its original transaction because of the order manipulation.

Liquidation scams

Liquidation scams are even more dangerous than other MEV bot scams. Scams like these exploit users who take loans from lending protocols like Aave. To borrow a loan, you usually have to drop collateral. So, if the protocol lends a user $1000 USDT, it may require a collateral of 0.43 ETH as a guarantee that the user will pay back.

Liquidation scams like aave - Screenshot
Liquidation scams like Aave – Screenshot

Suppose ETH experiences a significant price drop, nearing the liquidation price. In that case, the MEV bot can quickly detect this and place a significant sell order for that token (ETH), causing the price to go even lower and hitting the liquidation price. 

This process automatically triggers the collateral’s liquidation, forcing the user to repay the loan. The borrower loses in two ways: 

  • Their collateral’s value falls to a price much lower than when they staked it, making the borrower lose most, if not all, of it.
  • If the collateral’s value becomes less than the borrowed amount, they must repay any outstanding debts with extra funds.

The MEV bot gains because the protocol pays the liquidator a percentage of the liquidated collateral.

Fake MEV bot scams

Because of how profitable they seem, Fake MEV bots are rampant in the crypto market. Scammers promise unsuspecting users high yields by using their AI-powered MEV bots. They create a legit-looking smart contract you can scan on Etherscan. But when you use the bot and link your wallet to it, a piece of code allows them to access it and withdraw your funds.

This is the most common kind of MEV bot scam. Another kind involves malicious actors providing MEV bots but charging such a high fee that you make little to no profit when you use them. 


Dangers of MEV bot scams

The following are the dangers of MEV bot scams in decentralized AI trading.

Invisible fees 

During a front-running or sandwiching attack, unsuspecting users typically end up paying more than they should for transactions because of the slippage-induced price hike the MEV bot orchestrated. These extra charges are usually called invisible fees because of the nature with which they appear.

Liquidation losses

Losing collateral is one of the biggest problems MEV bots cause. There are unique MEV bots dedicated to this cause alone, seeking risky loans and causing liquidation for the borrowers. 

Network Congestion

Because there are so many MEV bots on the Ethereum blockchain, for instance, they cause network congestion, delaying transactions and requiring higher gas fees for quicker executions. 

Centralization risks

The main goal of a blockchain network like Ethereum is decentralization. So, when MEV bots and block validators control transaction executions and even make huge profits from manipulating them, the blockchain becomes increasingly centralized.


How to Avoid MEV Scams

Avoiding MEV bot scams can be challenging, considering how realistic bot providers’ claims can sometimes be. Avoiding front-running and other MEV scams is even harder, considering that you have no influence on the block creation process. 

Thankfully, there are some ways you can mitigate these risks to a certain degree. They include the following:

Do your own research

Before you select an MEV bot, conduct thorough research to determine whether your options are legitimate. Avoid watching videos uploaded only by the bot provider and its developers. Seek balanced reviews, especially from third-party providers who have tested the bots themselves.

Use anti-MEV trading tools

To avoid being maliciously sandwiched in MEV strategies, consider using anti-MEV trading tools. Some sniper bots, like Banana Gun, have in-built anti-MEV strategies to ensure that you don’t suffer losses due to manipulators. In addition, consider connecting to a RPC Endpoint, which sends your transactions directly to block creators to include on-chain, bypassing the public mempool.

Use MEV bots sparingly

To avoid being scammed by an MEV bot provider, use MEV bots sparingly. If you decide to use an MEV bot, scan its smart contract regularly to spot any vulnerabilities. Never share your private keys with the bot, either. If you must link a wallet, only use a burner wallet with funds you don’t mind risking.

Elevate Your Earnings: Discover Passive Profits with Automated AI Trading Bots
Elevate Your Earnings: Discover Passive Profits with Automated AI Trading Bots

Conclusion

Although MEV strategies can sometimes be helpful, they have incredible potential to be used maliciously, putting individuals at risk and entire blockchain platforms in danger of being centralized. In this article, we’ve discussed harmful MEV strategies and how to avoid them. With this information, you should be able to conduct safer decentralized AI trading while avoiding being exploited.


FAQ

How do MEV bots make money?

MEV bots make money by strategically inserting their transactions in order blocks so that they profit from price movements. They also perform swift arbitrage and use flash loans. However, MEV strategies can be malicious, too, causing unsuspecting users to pay more for transactions and threatening blockchain decentralization.

Are MEV bots legal?

Since blockchain platforms like Ethereum and Solana are decentralized, MEV bots are technically legal. There aren’t any regulations against using MEV bots on decentralized exchanges, but malicious MEV activity is illegal on centralized exchanges.

How to counter MEV bots

To counter MEV bots, use anti-MEV trading tools like Banana Gun sniper bot or centralized exchanges for trading. You could also connect to a RPC Endpoint, which submits your transactions directly on-chain without passing through the mempool.

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