Bots are fleecing unsuspecting crypto traders this week as a meme coin frenzy sweeps the market. Their prime tactic: manipulating the way Ethereum processes and records transactions for surging tokens, like the new Pepe the frog-themed meme coin, PEPE.
Automated programmes called sandwich bots have raked in millions of dollars, with one sandwich bot in particular called jaredfromsubway.eth profiting $1.7 million so far.
Market phenomenon
The programmes “sandwich” a victim’s transaction between two of their own. Their controllers are targeting a market phenomenon called slippage, which is the difference between the expected price of a trade and the price when the order actually goes through.
“Every time a new token goes viral, the token price is very volatile,” Martin Köppelmann, co-founder of the Gnosis blockchain, told DL News.
“This leads to a situation where transactions will often fail” when a trader uses what’s known as the default slippage tolerance, which is a percentage that can range depending on the trade’s size, liquidity, and level of risk the trader is willing to accept.
Traders then often increase the slippage tolerance, he said, “but that will get them slaughtered by sandwich bots.”
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The sudden influx of new meme coins — tradable tokens representing popular internet figures such as the Doge dog or Pepe the Frog — is spurring both euphoria and fear in a market struggling to shake off a long downturn.
Launched on April 14, PEPE has soared to a market cap of almost $120 million, according to data from CoinGecko. Several other meme coins trading under the tickers WOJAK, CHAD, PEPEMOON, and SIGMA have also spiked.
On-chain data shows one early buyer, who is currently the largest PEPE holder, bought over 5.9 trillion tokens for around $263 shortly after launch. That stack is now worth more than $1 million.
‘One early buyer bought over 5.9 trillion tokens for around $263 shortly after launch. That stack is now worth more than $1 million.’
“A huge surge in meme coins tends to mean the market is slightly unhealthy,” crypto researcher and investor mhonkasalo told DL News. “Generally the dumber the stuff that pumps is, the more cautious one tends to be.”
The scramble for profits is making it easier for sandwich bots to exploit unwitting investors. During the last meme coin rally in 2021, they were some of the most sandwiched thanks to their high volatility and popularity with inexperienced traders, according to a report from Eden Network.
Sandwich bots in action
The sandwich bots tactic isn’t that different from front-running stocks, an illegal practice in which traders use inside information to leapfrog big buy orders and capture upside.
Sandwich bots buy the right to rearrange transactions to generate profits for themselves. The bots scan the Ethereum network for users buying a token and then jump the queue and place a large order ahead of them, bumping up the price.
After the victim’s trade is processed, increasing the price further, the bot sells the tokens for a new higher price.
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Sandwich bots are a form of an important but little understood strategy called MEV.
Blockchain networks, of course, function by perpetually expanding decentralised ledgers to process and record transactions. Utilising MEV, which is an acronym for Maximal Extractable Value, a trader can deliberately reorder transactions as a new block of transaction data is produced for the ledger, and pocket a tidy profit.
Lion’s share of profits
As a result, MEV often saddles investors with poorer deals when they’re buying tokens. It’s as if an unseen broker is taking a bite out of a trade without the knowledge of the buyer. But the broker is using bots at scale to execute the move.
This week, one sandwich bot in particular is taking home the lion’s share of the profits, said Sea Launch, an NFT data and research platform.
“In the last seven days, most MEV activity is coming from a single bot called jaredfromsubway.eth, which profited $1.7 million,” the platform said.
While there are ways for traders to prevent sandwich bots from targeting their trades, many buying PEPE and other memecoins did not take the proper precautions.
The increased bot activity is also driving up the cost Ethereum users must pay to send transactions. Yesterday, the Ethereum gas price hit a high of 200 gwei, meaning simple swaps on decentralised exchanges briefly cost in excess of $50.
According to data compiled by hildobby, a data analyst at crypto venture fund Dragonfly, the jaredfromsubway.eth sandwich bot was responsible for 7% of all gas fees paid on Ethereum yesterday.
Fighting the sandwich bots
“Sandwiching is all about making sure your profit per trade is higher than fees, and slippage helps there,” hildobby told DL News.
While there are ways for traders to prevent sandwich bots from targeting their trades, many of those buying PEPE and other memecoins on decentralised exchanges recently did not take the proper precautions.
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Luke Lichtenstein, a communications rep for Eden Network, told DL News that traders on decentralised exchanges need to use custom RPCs to avoid getting sandwiched. An RPC — or Remote Procedure Call — is a type of computer server that lets users send transactions to different blockchains.
Eden Network builds infrastructure to help users stay a step ahead of sandwich bots and other forms of MEV.
“These custom RPCs bypass the public transaction pool so sandwich bots can’t see and exploit your pending transactions,” Lichtenstein said.
Happy memories
The problem of sandwich bots isn’t a new one. According to a recent EigenPhi report, sandwich bots were involved in $287 billion worth of trades on decentralised exchanges last year.
With meme coins evoking happy memories of bull markets gone by, investors would be wise to recognize there are more ways to lose money than a drop in token prices.
“I’m not the biggest fan of meme tokens,” said hildobby. “They tend to lead to a lot of clueless people getting wrecked.”
Got a tip about Pepe, MEV or other potential stories? Slide into my DMs at [at]timincrypto or email me at tim[at]dlnews[dot]com
Correction: This article has been corrected to remove the $219 million figure earned by the MEV bots. The figure may be misleading.
