3.1 The Different Types of MEV Strategies

MEV is a broad category of trading techniques that exploit inefficiencies in decentralized exchanges and blockchain transactions. Below are the most common MEV strategies traders use:

1. Arbitrage MEV

Arbitrage takes advantage of price discrepancies between different decentralized exchanges (DEXs). Traders buy an asset at a lower price on one DEX and sell it at a higher price on another, profiting from the difference.

• Example: A token is trading for $1.00 on DEX A and $1.05 on DEX B. An arbitrage bot buys at $1.00 and immediately sells at $1.05 for an instant profit.

2. Liquidation MEV

Liquidation MEV profits from undercollateralized loans on lending platforms. When a borrower’s collateral falls below the required threshold, their position gets liquidated, and MEV bots race to execute the liquidation and claim rewards.

• Example: A borrower on Aave takes a loan using ETH as collateral. When ETH’s price drops, the position becomes liquidatable, and MEV bots execute the transaction to collect a liquidation bonus.

3. Front-Running MEV

Front-running happens when a trader detects a large pending transaction in the mempool and submits their own trade right before it, benefitting from the price movement that follows.

• Example: A whale places a buy order for $500,000 of a token. A front-running bot buys in first, pushing the price up, and then sells at a higher price.

4. Back-Running MEV

Back-running is the reverse of front-running. Instead of placing a trade before a large transaction, traders place one right after, capturing the continued price movement.

• Example: A whale’s massive trade causes a price spike. A back-running bot buys immediately after, riding the price surge before selling.

5. Sandwich Trading MEV

Sandwich trading involves placing two trades—one before and one after—a large pending transaction, effectively “sandwiching” it and profiting from the price movement.

• Example: A whale places a large buy order for a token at $1.00. A sandwich bot buys before the order executes, waits for the price to increase, then sells after for a guaranteed profit.