Popular investment wisdom posits that if you don’t find a way to make money while you sleep, you will work until you die. Software engineer Nathan Worsley has discovered a way to make money not only when he is sleeping, but while he eats breakfast, goes to the gym and even soaks in the sauna inside his London home. He’s a developer of crypto trading bots, and over the last two years, he has been earning millions training his predatory algorithms on a market where speculation is rampant and too-good-to-be-true returns have attracted hordes of gullible investors.
Last fall, for example, the 33-year-old homed in on decentralized finance (DeFi) platforms called Wonderland and Abracadabra. They promised an unbelievable 80,000%-plus to people who borrowed a coin called “Magic Internet Money” (MIM) and “staked” it, or placed it into a sort-of crypto savings account. Borrowers had to pledge collateral equivalent in value to roughly 110% of the loan, but if the collateral’s value fell, they’d get automatically liquidated by the software or “smart contract” underlying the loan.
To Worsley and his trading bot, the most attractive part of the whole gambit was a 12.5% reward paid to anyone willing to help liquidate borrowers whose collateral no longer met stipulated minimum requirements.
In crypto, unlike traditional finance, liquidations are automatic. Seconds after your collateral’s value dips too low, it’s seized and sold, and you’re often left with only the funds you had borrowed. It’s a stark difference from a margin call for a stock investment, where you might receive a stern phone call from your broker demanding you either shore up your collateral or pay back your loan.
On Abracadabra, collateral for a loan denominated in “Magic Internet Money” need not be in the form of something as tangible as cash or Treasury bills. Any number of speculative cryptos will do. So in the fall of 2021 as crypto prices started declining, Worsley built a software bot to pounce in the event that MIM investors suddenly had to be liquidated because some of the flimsy collateral tokens backing the loans swooned in value.
In January 2022, that’s exactly what happened. Two cryptocurrencies used as MIM collateral–Wonderland and Wmemo (a coin that stands for “Wonderful Memories”)—plunged 86% and 70% in value, respectively.
Worsley’s bot immediately went to work. Prior to the plunge, it had checked people’s balances and predicted who’d be liquidated based on pending transactions and fluctuating crypto prices. When it found a likely liquidation candidate, it sent a digital message telling Abracadabra’s DeFi software that it wanted to become the liquidator. If it arrived first in line to do the job, Worsley’s bot would quickly pay back the user’s original loan, receive an equivalent amount in collateral and collect a bonus of up to 12.5% of the loan’s value.
All of this happened in a thousandth of a second, or the time it takes for a camera to flash. The result was over 1,000 liquidations and a $200,000 windfall for Worsley.
Welcome to the wacky world of MEV, or Maximal Extractable Value, where software-engineers-turned-traders try to outsmart (and sometimes even sabotage) each other and get rich off the unique and often inefficient structure of blockchain transactions. Think of Worsley’s small operation as a crypto version of what high frequency trading hedge funds like Citadel Securities and Virtu Financial do in traditional stock markets.
“It’s somewhat of an art form,” says Worsley, who started a crypto exchange before becoming an MEV “searcher” two years ago. “I liken it to being an engineer for a Formula One race car. You are tuning this machine every day, trying to squeeze every inch of performance out of the machine, and it’s racing against other people’s machines.”
Experts estimate that at least $675 million in MEV profits have been realized on the Ethereum blockchain alone over the past two and a half years. When counting other blockchains such as Binance Smart Chain and Solana, the total MEV market easily exceeds $1 billion in profits.
Not all MEV traders are crypto repo men like Worsley. Many profit by altering the order of blockchain transactions. In the case of Ethereum, it takes 12 seconds to complete a transfer. During that window, bots can see every pending, unconfirmed transaction–essentially peering into the future and allowing them to front-run trades.
“Ninety-nine percent of this stuff doesn’t look that different from traditional finance,” says Tarun Chitra, a former coder at hedge fund D. E. Shaw and the founder and CEO of Gauntlet, a crypto startup that helps decentralized finance projects assess risk.
Except MEV traders are operating in a world largely without regulation. Unlike their stock market counterparts, they have no guardrails to worry about, and there’s no cop patrolling the beat. Most MEV plays are centered on decentralized exchanges like Uniswap, which recently surpassed $1 trillion in all-time trading volume, not on exchanges like Coinbase that are subject to some regulatory oversight. And just as high frequency traders or “quants” have emerged as the most profitable among Wall Street’s hedge funds, so too are the MEV crypto traders gushing profits.
Claims Dean Eigenmann, a 24-year-old Swiss MEV searcher known for brandishing his leopard-print fur coat, $50,000 Patek Philippe watch and nearly 40 tattoos on social media: “My MEV team is making more money in a day [than] your venture fund has ever made.”
MEV strategies come in three predominant forms. The most controversial is a particularly pernicious form of front-running known as the sandwich attack. In this maneuver, an MEV bot spots someone else’s intent to buy a coin and sets itself up to profit from the small price appreciation that the other person’s bid will likely cause. The bot jumps the line to purchase the coin at a fraction less, front-running the trade. Then, after the purchase by the mark in the middle goes through, the bot tops off the sandwich by automatically selling the token at a profit.
Front-running is not only lucrative for the MEV trader, but also for the “validators” running software to approve blockchain transactions. Just as big quant hedge funds engage in “payment for order flow” from brokers like Robinhood to purchase the right to execute retail traders’ orders, front-running MEV traders essentially buy their way to the head of the line. The result is the validators end up with a bigger slice of the front-running profits than do the folks creating the bots.
A warring MEV firm launched a denial-of-service attack against Worsley when they knew he’d be on an 11-hour flight. His trading servers went down for hours, and he missed out on at least $100,000 in profit.
Arbitrage is another common but less controversial MEV tactic in which traders exploit tiny price differences for the same token on different exchanges. Given there are more than 500 loosely regulated crypto exchanges globally and thousands of cryptocurrencies, there’s abundant opportunity to profit. “Many people think this sort of MEV is beneficial–it pushes the market to what the true price should be,” says Vy Le, a partner at Bain Capital Crypto and former SEC staffer.
The last flavor of MEV trading is the liquidation play, the kind Worsley’s bots profited from in January. Liquidation trades are confined to DeFi platforms where leverage is prevalent.
Understandably, MEV traders tend to be a low-profile and secretive lot. Symbolic Capital Partners (SCP), cofounded by Lev Livnev, a 26-year-old programmer with a bushy head of red hair, is said to be one of the most successful MEV trading firms. Yet SCP has little online presence other than a one-page website with a trippy logo, and multiple emails to the firm went unanswered.
There’s big money involved in this game. For example, sources say FTX billionaire Sam Bankman-Fried’s Alameda Research, one of the top crypto trading firms, is running MEV strategies on blockchains like Solana. (Alameda Research declined to be interviewed or answer questions over email for this article.) Wintermute, a London firm that trades about $100 billion worth of digital assets a month, has an active MEV operation.
Dean Eigenmann runs his three-person MEV team as part of Dialectic, a Swiss investment firm he founded with Ryan Zurrer, a former partner at crypto hedge fund Polychain. Zurrer and Eigenmann won’t be specific about their own MEV earnings, but Zurrer does offer some detail on the playing field. He estimates there are up to 50 teams actively competing in MEV, with perhaps 10 of them raking in most of the profits. The top-performing teams now bring in “high five figures, mid six figures” in profits a month, and netted millions in individual months when the market conditions were perfect, especially in mid-2021 and earlier, he says. Since then, he adds, competition—and the overall crypto winter—has driven down profits.
Ryan Zurrer (above) is an investor in Eigenmann’s MEV shop and paints the top MEV traders as obsessive programming and math geeks. “The culture is one of Olympians training for the Olympics,” he says.
The competition is often ruthless. Worsley reports members of a warring MEV firm once launched a denial-of-service attack against his operation when they knew he would be on an 11-hour flight. His trading servers went down for hours, and he missed out on at least $100,000 as a result. “You might be friends with people, but at the end of the day, you’re all trying to bankrupt each other,” he says.
Worsley says he won’t engage in sandwich attacks and was incensed in early 2021, when he noticed that Ethermine, an Austrian company that then comprised 20% of all Ethereum mining, according to CryptoCompare, was running sandwiches on traders. It’s as if the New York Stock Exchange were front-running investors whose trades it was handling.
“This is an organization that is actually mining blocks, so they’re securing the blockchain itself,” says Worsley. “I felt it was a real affront to Ethereum users.”
In response to Ethermine’s sandwich trades, Worsley created his own decoy cryptocurrency and built a trap into its code: You could buy the token from someone else, but you essentially couldn’t sell it. He called the coin Salmonella because “it’s the worst possible thing you could have in a sandwich,” he says. Then he baited Ethermine with a transaction he thought their MEV bot would gobble up. Sure enough, in March 2021, Ethermine bought the poison tokens and got stuck with them. All told, Worsley claims he pocketed about $150,000 at Ethermine’s expense. Ethermine didn’t respond to multiple requests for comment.
“Not bad for a day’s work,” says Worsley.
Leave it to the crypto community to come up with a solution to the MEV scourge that actually encourages this questionable practice. Flashbots, a startup founded in 2020, creates software that makes MEV tools available to retail investors—a move that it believes will level the playing field, reduce MEV profits and prevent the concentration of power.
Flashbots cofounder Phil Daian is a 28-year-old cryptocurrency researcher who co-published a paper in 2019 describing how bots were preying on novice crypto traders on Ethereum. The paper, titled, “Flash Boys 2.0: Front-running, Transaction Reordering, and Consensus Instability in Decentralized Exchanges,’’ begins with a blunt rebuttal for crypto idealists: “Blockchains, and specifically smart contracts, have promised to create fair and transparent trading ecosystems. Unfortunately, we show that this promise has not been met.”
Flashbots’ software lets you bundle trading orders and specify that you only want to make a trade if you can successfully front-run another user (it does this by letting traders pay validators a fee to jump to the front of the line). Using Flashbots also protects you from being front-run. If Daian and others have their way, MEV trading will ultimately become as easy for the novice investor as it is for big firms.
In September, Skip Protocol raised a $6.5 million seed funding round from the likes of Bain Capital Crypto to do for the Cosmos blockchain what Flashbots has done for Ethereum–make MEV more accessible and reduce the congestion caused by bot transactions. Other services like BloXroute, Jito Labs and Rook are also trying to mitigate MEV in different ways, such as by returning some MEV profits to users. Meanwhile, DeFi platform Uniswap has added warnings for users when they’re about to place a trade that’s susceptible to being front-run.
For now, however, experts expect the MEV market to keep growing alongside the ballooning adoption of decentralized exchanges.
Where are the regulators? Cornell business school professor Maureen O’Hara points out that MEV front-running (or even a sandwich play) isn’t illegal in the same way front-running is in the stock market because the information on pending orders used by MEV traders isn’t confidential–it’s publicly available on the blockchain.
Charging people with market manipulation and fraud is potentially another matter. “They can always do that,” says O’Hara, noting that the wire fraud statute is very broad. In September, for example, the brother of a former Coinbase product manager pleaded guilty to one count of conspiracy to commit wire fraud as part of what the government said was a scheme to commit “insider trading” by misusing confidential Coinbase information about which crypto assets were scheduled to be listed on its exchange. The prosecutors’ insider trading hook was that Coinbase kept such information strictly private and prohibited its employees from trading on it or tipping off others. It’s hard to see how that same logic could be applied to information that’s public on the blockchain and used by an unrelated individual.
For now, just count the robot traders of MEV as yet another reason most investors should steer clear of crypto. Says O’Hara, “No market succeeds if it’s not viewed as fair. It’s as simple as that.”
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