MEV Protection Guide: How To Keep Your NFTs and Crypto Transactions Safe
Cryptocurrencies and NFTs have taken the world by storm, creating new opportunities for trading and investment. However, this digital gold rush has also introduced challenges that traders need to understand and navigate. One such challenge is MEV, or Miner Extractable Value. This article will break down the basics of MEV, explain how to protect your assets from MEV bots and Sandwich Attacks, and recommend popular trading platforms that offer built-in MEV protection.
Table of Contents
What Is MEV?
MEV, or Miner Extractable Value, is a term used in the world of cryptocurrencies and NFTs. To understand MEV, we need to know a little bit about how transactions work in the digital world.
When you send or receive crypto or NFTs, your transaction is recorded on a digital ledger called a blockchain. Miners are the people who make sure these transactions are processed and added to the blockchain. They do this by solving complex puzzles, and they get rewarded for their work with some tokens.
Now, imagine there’s a really popular new video game console that everyone wants to buy online. There’s a huge rush of people trying to buy it all at once, and the website can only process a limited number of orders at a time. In this situation, some people might be willing to pay extra to make sure their order gets processed before others.
MEV is a similar concept, but in the crypto and NFT world. Since miners can choose which transactions to process first, they can make extra money by prioritizing transactions that offer higher fees. This creates an opportunity for some sneaky people or automated programs to try and exploit the system by manipulating transaction orders, which can lead to higher fees or worse prices for regular users.
In short, MEV is the extra profit that miners can make by strategically choosing the order in which they process transactions, and it can sometimes result in less-than-ideal situations for everyday users of crypto and NFTs.
MEV bots and their impact on Crypto and NFT markets
The issue here is bad actors have figured out a way to make money from unfortunately souls who trade crypto and NFTs. One of the ways is through MEV bots. MEV bots are automated programs designed to take advantage of MEV opportunities. These bots can front-run, back-run, or sandwich user transactions, leading to traders paying higher fees, experiencing price slippage, or even having their trades fail.
What Is "Front Running" In NFTs?
Imagine you’re at a school fair where you can buy unique digital stickers, which are like NFTs (one-of-a-kind digital collectibles). You have your eyes on a particular sticker, and you’re about to buy it at a certain price.
There’s a sly person, let’s call them the “attacker,” who notices which sticker you want to buy and figures out how much you’re willing to pay for it. Right before you make your purchase, the attacker quickly buys the same sticker at the current price.
Because the attacker bought the sticker just before you did, the price of the sticker goes up due to increased demand. Now, you have to pay a higher price than you initially intended if you still want to buy the sticker.
After you buy the sticker at the higher price, the attacker sells their sticker back to the market. They make a profit from the difference between the original price they paid and the higher price you paid.
This sneaky strategy is called “front-running” because the attacker jumps in front of your purchase, buys the NFT before you, and profits from the increased price caused by their actions.
How To Protect Yourself From MEV Bots?
When you are bidding for popular NFTs, it’s important to understand and apply these MEV protection strategies to prevent unwanted losses.
1. Understanding transaction sequencing
Transaction sequencing refers to the order in which transactions are processed on the blockchain. By being mindful of the position of your transaction, you can reduce the likelihood of being exploited by MEV bots.
2. Slippage tolerance
Slippage is the difference between the expected price of a trade and the price at which it’s executed. By setting a slippage tolerance, you can limit the amount of price movement you’re willing to accept. This helps protect against price manipulation by MEV bots. In general, if you accept a lower slippage percentage, you are less likely to be front-run.
3. Gas price adjustments
Adjusting the gas price of your transactions can help you find a balance between speed and cost, reducing the chances of being targeted by MEV bots. For instance, if you want to acquire a highly sought after NFT, don’t skimp on gas fees!
4. Utilizing decentralized finance (DeFi) aggregators
When trading crypto, DeFi aggregators route your trades through multiple decentralized exchanges, providing better prices and liquidity while reducing the risk of MEV exploits.
5. Privacy solutions and layer-2 networks
Using privacy solutions or layer-2 networks can help obscure your transaction data, making it more challenging for MEV bots to target your trades
Trading Platforms with Built-in MEV Protection
Here’s a tip for crypto trading: Selecting a trading platform that offers built-in MEV protection is essential to ensure that your trades are executed securely and at the best possible prices.
Here are some popular trading platforms that offer built-in MEV protection features:
Uniswap V3: This decentralized exchange (DEX) offers customizable slippage tolerance and gas fee settings, helping users to avoid being targeted by MEV bots.
SushiSwap: SushiSwap’s unique token-swapping mechanism and integration with DeFi aggregators help protect users from MEV exploits while providing competitive prices.
Balancer: Balancer’s smart order routing and liquidity pools make it more difficult for MEV bots to target trades, providing users with a safer trading experience.
Curve Finance: Curve’s focus on stablecoins and wrapped assets, along with its time-weighted average price (TWAP) feature, reduces the risk of MEV exploits while maintaining low slippage.
Understanding MEV and implementing protection strategies are essential for anyone looking to trade cryptocurrencies and NFTs securely. By being aware of transaction sequencing, setting slippage tolerance, utilizing TWAP orders, adjusting gas prices, and using DeFi aggregators and privacy solutions, traders can mitigate the risks associated with MEV. Additionally, choosing a reliable trading platform with built-in MEV protection, such as Uniswap V3, SushiSwap, Balancer, or Curve Finance, further enhances the security and efficiency of your trades.