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BEGINNER’S GUIDE TO AN MEV BOT: CREATING AN ARBITRAGE BOT ON ETHEREUM MAINNET
Blocknative Ethereum Web3
Blair Marshall
January 17, 2023
12 minute read
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January 2023 Update: If you are an MEV searcher, Blocknative now offers an MEV
bundle RPC endpoint. Searchers can interact with the RPC endpoint at
https://api.blocknative.com/v1/auction. The API provides JSON-RPC methods for
interfacing with Blocknative builders, which are documented via our bundle docs.
At Blocknative we are often asked about getting started in the world of MEV. In
this blog, I will go over the creation of a very basic arbitrage script that
highlights some key ideas in the world of MEV bots.
MEV, or Maximal Extractable Value, is essentially the maximum value that can be
extracted from a block. While this had traditionally been an opportunity that
only miners could participate in—which is why it was sometimes called Miner
Extractable Value—the democratization of the mempool has allowed more
opportunities for traders to extract value by influencing what goes into a
block. MEV Searchers can easily affect which transactions are included and
excluded, or even change the order of transactions in a block, by seeing what’s
already in the mempool and then timing and pricing their transactions
accordingly.
These Searchers will typically run algorithms to detect profitable MEV
opportunities and have bots automatically submit any profitable transactions to
the network. This blog details my attempt at creating one of these bots, and the
lessons I learned along the way. You can treat this as a beginner’s guide to
help you get your creative juices flowing and start thinking about other
strategies unique to you.
Please note the script and smart contract in this blog are for educational
purposes only. You will not make any money using this code, so please do your
own research before deploying any of your own money into any opportunity.
Ethereum mainnet is extremely competitive, and this idea is quite common among
the elite bots in the ecosystem.
WHAT IS AN ARBITRAGE STRATEGY IN THE WORLD OF MEV?
Arbitrage is an MEV strategy that allows traders to profit from price
differences between the same asset in different markets. In the traditional
financial world, this creates an opportunity to make two trades to get the two
exchanges into equilibrium—and make a little profit for doing so.
You would start with asset A and sell it for asset B on the exchange where asset
B is cheaper. Then, you would take asset B and sell it for asset A on the other
exchange, receiving more of asset A in return than when you started. This basic
example is extremely competitive in traditional finance and many High Frequency
Traders compete against each other to be the first ones to complete the
arbitrage opportunity.
In the MEV world, things are a little bit more complicated. In crypto,
transactions are submitted to the mempool—which, for the most part, is public—
for inclusion into the next block. This means traders can see pending
transactions in the mempool and know what the effects will be once they are
finalized on-chain.
This added visibility results in MEV arbitrage working slightly differently than
traditional arbitrage because traders don’t need to wait until transactions are
on-chain to find an opportunity. As a result, MEV searchers need a real-time
data feed of the mempool to analyze each transaction as it comes in.
Once you detect a transaction that might cause an arbitrage opportunity when it
lands on-chain, you can send your two transactions that will complete the
arbitrage opportunity directly into the mempool or to the flashbots private
relay as a bundle. If done correctly, this means the mempool transaction that
creates the opportunity + your two transactions will all be mined in the same
block. As a result, the moment that arbitrage opportunity is created it is also
completed by the next two transactions—your two transactions.
Let’s break this down with a completely unrealistic, but hopefully illuminating
example.
Suppose you are monitoring the mempool and you detect a transaction that will
impact the liquidity pool on Uniswap V2 for token A and token B. Since you know
that liquidity pools are governed by the equation x * y = k (I am ignoring fees
in this example), then you know when you see somebody submit a swap for 2 of
token A for as much of token B as possible, you can calculate (based on the
reserves of those tokens in the liquidity pool, which, in this case, are 10 and
10) that they will receive 1.7 of token B in return.
The key insight is that you know this transaction will impact the price between
token A and token B on Uniswap V2, but not on another DEX like Sushiswap… at
least not until somebody takes advantage of the arbitrage opportunity. The
moment this transaction is mined, token A will be cheaper on Uniswap than
Sushiswap, so whoever can sell token A on Sushiswap for token B and then sell
those token Bs on Uniswap for token A should end up with more token A than they
started. And that is exactly what this example illustrates.
There is some specific math that you can do to calculate the optimal amount to
trade back and forth, but is beyond the scope of this post.
SEARCHING FOR ARBITRAGE OPPORTUNITIES
While doing some research on the various opportunities in MEV, I stumbled upon a
pre-built smart contract in this awesome github repo, which walks you through
how to optimally calculate the correct amount needed to arbitrage between two
Uniswap V2 DEXs—for example Uniswap V2 and Sushiswap.
Since this project wasn’t really about taking a deep dive in solidity, this repo
was perfect to get a proof of concept. The key insight with this smart contract
is that you can supply it two pools—one Uniswap pool and one Sushiswap pool— and
return whether there is any profit arbitraging the two pools. However, the
calculation is being done by looking at the reserves of those two pools as they
currently stand (ie. the latest block state).
But what if you knew how those pools were going to change prior to the next
block? Then you would know about arbitrage opportunities before they happen
on-chain and you could submit your arbitrage transaction in the correct position
to take advantage of these opportunities. My goal in this project was now to
write a basic script that modifies this smart contract to successfully detect
arbitrage opportunities using the Blocknative Simulation Platform’s net balance
change calculation.
WRITING A BASIC ARBITRAGE SCRIPT
This post is not a post to learn about solidity. There are plenty of great posts
and tutorials out there, but in order to truly compete for MEV opportunities (at
least in the EVM world), you need to know some solidity.
That said, I used my limited knowledge of solidity to update the smart contract
to fit my needs. In order to calculate the real-time profit of an arbitrage
opportunity, I would need to have some way of supplying my getProfit function
with an adjustment on a liquidity pool. This adjustment is when I see a swap
transaction in the mempool that will impact the Uniswap or Sushiswap liquidity
pool.
I incorporate the impact of the mempool transaction when I calculate the profit
potential for the arbitrage opportunity. To incorporate this adjustment, I
created a new struct called ‘Adjustments’ that would host the pool that needed
to be adjusted, the direction it needed to be adjusted and the amount of
adjustments to each token in the token pair. Then you will notice that getProfit
relies on getOrderedReserves to calculate the reserves of each pool and the
correct direction of the trades. Therefore, I added some logic to
getOrderedReserves that would take in the mempool data of a token swap on
Uniswap or Sushiswap and then adjust the token reserves of that pair so when
getProfit was called it would incorporate the mempool data instead of just the
latest chain state.
function getOrderedReserves(
address pool0,
address pool1,
Adjustments memory adjustment,
bool baseTokenSmaller
)
internal
view
returns (
address lowerPool,
address higherPool,
OrderedReserves memory orderedReserves
)
{
(uint256 pool0Reserve0, uint256 pool0Reserve1, ) = IUniswapV2Pair(pool0).getReserves();
(uint256 pool1Reserve0, uint256 pool1Reserve1, ) = IUniswapV2Pair(pool1).getReserves();
if (pool0 == adjustment.adjustmentPool) {
if (adjustment.adjustmentToken0 == IUniswapV2Pair(pool0).token0()) {
pool0Reserve0 -= adjustment.adjustment0;
pool0Reserve1 += adjustment.adjustment1;
} else {
pool0Reserve1 -= adjustment.adjustment0;
pool0Reserve0 += adjustment.adjustment1;
}
} else {
if (adjustment.adjustmentToken0 == IUniswapV2Pair(pool1).token0()) {
pool1Reserve0 -= adjustment.adjustment0;
pool1Reserve1 += adjustment.adjustment1;
} else {
pool1Reserve1 -= adjustment.adjustment0;
pool1Reserve0 += adjustment.adjustment1;
}
}
Now that I have adjusted the smart contract to be able to incorporate the
real-time mempool data, I can complete my script using Blocknative’s mempool API
and flashbots private relay.
Using Simulation Platform, each simulation is done in isolation against the
current block state, meaning there is some degree of probability involved in the
‘pending-simulation’ payloads. However, if the transaction is at the top of the
block, then that effectively means it is happening against the current block
state, since there won’t be any transactions between the current block state and
this one. The best way to ensure it gets to the top of the block (or at least
close to it) is to use flashbots private relay.
For this project, I looked at pending simulation events on the Uniswap V2 and
Sushiswap routers using Blocknative’s Javascript SDK. The pending simulation
payloads include net balance changes on all the addresses involved (like the
liquidity pool), allowing me to do two things:
1. Check to see if that pair exists on the other exchange
2. Use the balance changes as inputs as the ‘adjustments’ in my getProfit
function in my smart contract
As I receive these events I loop through the netBalanceChange list in our
Simulation Platform payload and I skip when the address is equal to the actual
router itself (because I am only looking for liquidity pool addresses) or if the
netBalanceChange[index].address doesn’t have 2 elements (if it only has 1
element, then it can’t be a pool, because a pool would have 2 or more token
reserves with net balance changes).
If one of the addresses in the netBalanceChange field is not one of the router
addresses and has 2 different token addresses that have net balance changes,
then it must be a pool address. I now have the pool address, the token addresses
involved, and the net balance changes of each token. I can now check to see what
the other DEX’s liquidity pool address is so that I can supply it to my smart
contract. If the other DEX does not have a liquidity pool with the same token
pair, then I can’t arbitrage between the two, so I move on.
try {
for (entry in transaction.netBalanceChanges) {
if (transaction.netBalanceChanges[entry].balanceChanges.length !== 2
|| blacklist.indexOf(transaction.netBalanceChanges[entry].address) !== -1 )
{ continue }
pairAddress = transaction.netBalanceChanges[entry].address;
tokenAddress1 = transaction.netBalanceChanges[entry].balanceChanges[0].asset.contractAddress;
tokenAddress0 = transaction.netBalanceChanges[entry].balanceChanges[1].asset.contractAddress;
adjustment1 = transaction.netBalanceChanges[entry].balanceChanges[0].delta;
adjustment0 = transaction.netBalanceChanges[entry].balanceChanges[1].delta.substring(1,);
adjustment0 = ethers.utils.parseEther(ethers.utils.formatEther(adjustment0))._hex
adjustment1 = ethers.utils.parseEther(ethers.utils.formatEther(adjustment1))._hex
otherPairAddress = await getSushiPair(tokenAddress0, tokenAddress1)
if (otherPairAddress === undefined) {
otherPairAddress = await getUniPair(tokenAddress0, tokenAddress1)
if (otherPairAddress === undefined) {
continue
}
}
Likewise, if the other DEX does have a liquidity pool with the same token pair,
then I can arbitrage between the two. Using my script, this means I will have
detected a pending swap on either Uniswap or Sushiswap in the mempool and I have
located the same liquidity pool on the other DEX. Now I have all the information
I need to supply my smart contract to see if there is a profit opportunity.
The result I get from my smart contract doesn’t include gas, so I do a naive
calculation to see what the all in gas cost would be (including my extra tip to
the miners on the flashbots relay). I knew my two transactions would cost about
240K gas, so I hardcoded that in for my net-profit calculation. For my gas
price, I assumed I would need to give up 95% of my gross profit to compete in
the private relay. The 95% was hardcoded and arbitrary (room for improvement!).
If the net calculation is greater than 0, I have successfully found an arbitrage
opportunity where I will net 5% and give the miner 95%!
profitHex = await arbContract.getProfit(pairAddress, otherPairAddress, pairAddress, tokenAddress0, adjustment0, adjustment1)
const gross = ethers.utils.formatEther(profitHex.toString(10).split(',')[0])
const gasLimit = 240000
const gasFee = Math.floor(ethers.utils.parseEther(gross)*.95/gasLimit)
const gasCost = gasLimit*gasFee
const net = ethers.utils.parseEther(gross) - gasCost
CONSTRUCTING A FLASHBOTS BUNDLE FOR ARBITRAGE
Next, I needed to construct my flashbots bundle to send to the relay. Since the
detected mempool transaction could be a type 0 or type 2 transaction, I must
have scenarios for both. For more on using mempool transactions in your bundles,
you can refer to our prior post on using Blocknative with Flashbots.
if (transaction.type == 2) {
params = [
'0x01',
transaction.nonce === 0 ? '0x' : ethers.utils.hexlify(transaction.nonce),
ethers.utils.parseEther(ethers.utils.formatEther(transaction.maxPriorityFeePerGas))._hex,
ethers.utils.parseEther(ethers.utils.formatEther(transaction.maxFeePerGas))._hex,
ethers.utils.hexlify(transaction.gas),
transaction.to,
transaction.value === '0' ? '0x' : ethers.utils.hexlify(transaction.value),
transaction.input,
[],
transaction.v === '0x0' ? '0x' : transaction.v,
transaction.r,
transaction.s
]
s1 = '0x02'+encode(params).toString('hex');
} else {
params = [
transaction.nonce === 0 ? '0x' : ethers.utils.hexlify(transaction.nonce),
ethers.utils.parseEther(ethers.utils.formatEther(transaction.gasPrice))._hex,
ethers.utils.hexlify(transaction.gas),
transaction.to,
transaction.value === '0' ? '0x' : ethers.utils.hexlify(transaction.value),
transaction.input,
transaction.v,
transaction.r,
transaction.s
];
s1 = '0x'+encode(params).toString('hex');
}
I used my modified smart contract to construct my transaction, which would
include either two internal transactions or two swaps between the two DEXs.
const s2 = await arbContract.populateTransaction.flashArbitrage(
pairAddress,
otherPairAddress,
pairAddress,
tokenAddress0,
ethers.utils.parseEther('0')._hex,
ethers.utils.parseEther('0')._hex
)
s2.gasPrice = ethers.utils.hexlify(gasFee)
s2.gasLimit = ethers.utils.hexlify(500000)
s2.nonce = await wallet.getTransactionCount();
With the transaction constructed, I then created the flashbots bundle and
simulated it to ensure the transaction wouldn’t fail for any reason. I also
created a final net-profit calculation to ensure I was still actualizing a
profit. If my transaction passed the simulation, and I was still making a
profit, then I submitted it to the flashbots relay for inclusion.
const signedTransactions = await flashbotsProvider.signBundle([
{
signedTransaction: s1
},
{
signer: wallet,
transaction: s2
}
])
const blockNumber = transaction.pendingBlockNumber+1;
const simulation = await flashbotsProvider.simulate(signedTransactions, blockNumber);
if ('error' in simulation) {
console.log(`Simulation Error: ${simulation.error.message}`)
} else {
if (simulation.firstRevert!==undefined) {
console.log(simulation.firstRevert.revert)
} else {
const net2 = ethers.utils.parseEther(gross) - simulation.results[1].gasUsed*gasFee
console.log(`Net: ${ethers.utils.formatEther(net2)} | Pair address: ${pairAddress} | TxHash: ${transaction.hash}`)
console.log(simulation)
if (net2>0) {
console.log(`Coinbase diff: ${simulation.coinbaseDiff}`)
const submittedBundle = await flashbotsProvider.sendRawBundle(signedTransactions, blockNumber);
const bundleResponse = await submittedBundle.wait();
console.log(bundleResponse)
}
}
}
LESSONS LEARNED FROM CREATING A BASIC ARBITRAGE BOT
I ran my script for several days and it worked exactly as intended—it detected
profitable opportunities using Blocknative’s mempool API and submitted them to
flashbots to compete for inclusion by a miner. However, the opportunities this
script competed for were VERY competitive and I wasn’t able to outcompete the
other bots.
The biggest reason for this was that most of the other bot’s smart contracts
were far more gas efficient than mine, allowing them to pay more to the miner to
get included. Additionally, using flashswaps is pretty inefficient compared to
just doing the swaps with tokens you already own. There are a whole host of
other gas optimizations out there, but that is a very competitive, tough game to
play against people far better at solidity (and Yul!) than I am.
Other areas that I didn’t optimize include:
1. Choosing the correct tip to send to the miner.
2. Only looking at two DEXs.
3. Only looking at arbitrage between two tokens. A path-finding algorithm
across many pairs could result in better profit potential.
4. Trying this out on other EVM compatible chains like Polygon.
5. Cross-chain MEV.
TRADE WITH AN EDGE USING BLOCKNATIVE’S SIMULATION PLATFORM
Finding the best arbitrage opportunities is impossible without the best mempool
data feeds. Blocknative’s Simulation Platform leverages our Global Mempool Data
Platform to provide probabilistic outcomes of every public pending Ethereum
transaction, including detailed traces of each smart contract function call and
net balance changes.
MEV searchers can go hands-on today and monitor simulated transactions directly
on Mempool Explorer. Our powerful UI enables users to filter on everything in
the payload to ensure you get a fine-tuned view of the mempool that fits your
exact needs. These saved configurations can easily be integrated into any
project using websockets or webhooks.
OBSERVE ETHEREUM
Blocknative's proven & powerful enterprise-grade infrastructure makes it easy
for builders and traders to work with mempool data.
Visit ethernow.xyz
TABLE OF CONTENTS
* What is an arbitrage strategy in the world of MEV?
* Searching for arbitrage opportunities
* Writing a basic arbitrage script
* Constructing a flashbots bundle for arbitrage
* Lessons learned from creating a basic arbitrage bot
* Trade with an edge using Blocknative’s Simulation Platform
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