Arbitrage Bots: Tales of Multimillion-Dollar Triumphs and Catastrophic Failures

Arbitrage bots operating on blockchains have seen astronomical successes, with some raking in millions of dollars in single transactions, while others have faced catastrophic failures, resulting in losses of tens of millions. These automated programs, designed to profit from price discrepancies in the volatile cryptocurrency markets, walk a high-stakes tightrope where fortunes can be made or lost in an instant.

The Million-Dollar Successes

The most lucrative arbitrage bots often exploit Maximal Extractable Value (MEV), which is the profit a miner or validator can make by reordering, inserting, or censoring transactions within a block they are producing.

One of the most striking examples of a successful MEV arbitrage occurred on the Solana network, where a bot operator managed to earn nearly $1.8 million from a single transaction bundle.

This remarkable feat was achieved by capitalising on a large trade of the meme coin dogwifhat (WIF), effectively back-running the transaction to profit from the price slippage.

Another well-documented success is the notorious MEV bot known as “jaredfromsubway.”

This bot has consistently generated substantial profits, with reports indicating it has amassed millions of dollars in total earnings.

On a particularly fruitful day, the bot netted almost $300,000. Its primary strategy involves “sandwich attacks,” where it fronts-runs and back-runs large trades to profit from the price impact.

A case study of a sandwich attack bot on the Solana network further illustrates the potential for significant gains.

Over a 30-day period, this bot achieved a net profit of 6,900 SOL. While the dollar value fluctuates with the price of SOL, it represents a substantial and consistent return on investment.

The Catastrophic Failures

The world of blockchain arbitrage is not without its significant perils.

The very complexity and competitiveness that create opportunities for profit can also lead to devastating losses.

A landmark failure in the realm of MEV bots resulted in a collective loss of over $25 million for a group of these automated traders. In a sophisticated attack, a malicious actor managed to replace the bots’ normal transactions with their own, effectively draining the bots of their funds.

This incident underscored the vulnerability of even the most advanced bots to clever exploits.

In another telling incident, a Uniswap user lost $700,000 to an MEV bot. However, in a twist that highlights the high risks for bot operators, the bot itself only managed to profit a mere $260 from the trade.

The vast majority of the potential profit was consumed by a massive “bribe” paid to the network validator to prioritise its transaction.

This scenario, while not a direct financial loss for the bot’s operator in the traditional sense, represents a colossal failure in terms of its risk-to-reward ratio and operational efficiency.

Beyond these dramatic events, arbitrage bots regularly fail due to more mundane, yet costly, reasons:

• Technical Malfunctions: Bugs in the bot’s code or issues with API connections to exchanges can lead to missed opportunities or the execution of flawed trades, resulting in significant losses.
• High Transaction Fees: In the heat of competing for an arbitrage opportunity, bots can engage in “gas wars,” driving up transaction fees to a point where they erase any potential profit and even lead to a net loss.
• Market Volatility: Sudden and extreme price swings can turn a profitable arbitrage opportunity into a losing one in the milliseconds it takes to execute the trades across different venues.
• Failed Transactions: If one leg of a multi-part arbitrage trade fails to execute, the bot can be left with a large, unhedged position in a volatile market, leading to substantial losses.