MEV Bots: Switch From Searcher to Solver
Maximal extractable value (MEV) has become a controversial topic in the DeFi community over the last few years as the practice has gained wider adoption. Some blockchain projects take steps to protect their users from suffering MEV, but there are also advocates of the practice who argue that it contributes to market efficiency and validator compensation.
CoW DAO creates products that protect Ethereum users from negative outcomes, so it’s clear that participants in the DAO are no fans of MEV. The technical innovations that MEV searchers have pioneered in the pursuit of maximizing profits, however, are indeed impressive.
Thankfully, this tech can be put to good use in a way that benefits users and still makes money: Rather than being MEV searchers, these users should consider becoming CoW Protocol solvers.
What is a Searcher?
Searchers are DeFi market participants, most often bots, that monitor pending Ethereum transactions for arbitrage opportunities.
Captured arbitrage is known as maximal extractable value (MEV), and it’s a pernicious form of price exploitation that occurs across all types of transactions. To date, MEV has cost traders over $1.5 billion in losses. Most of these losses have been facilitated by searchers who pocket a large portion of the arbitrage for themselves.
What is a Solver?
CoW Protocol is a meta DEX aggregator that relies on bonded third parties known as “solvers” to execute user trades. The protocol uses an intents-based trading system where user intents get grouped into batches. The solver that can execute the orders at the best price wins the right to settle the batch (find out more about how CoW Protocol works here.)
Solvers are compensated in COW tokens for settling batches, incentivizing them to compete to find better prices and win the right to execute user intents. In return for this compensation, solvers provide users with a number of benefits including:
- Finding optimal prices for the trades in a batch
- Protecting users from MEV by executing transactions on their behalf
- Providing abstraction that allows for benefits like gasless trades, transaction bundles, directly tapping into LPs, and more
Searchers vs. Solvers
Fundamentally, searchers and solvers optimize for the same thing: maximizing profits. However, they serve different purposes, so their incentives diverge.
Searchers make money by performing MEV attacks on vulnerable transactions — giving users worse prices and keeping the difference for themselves. Searchers are incentivized to maximize their profits while ensuring that they are bidding enough for their transactions to be included in the next block.
In Ethereum, searchers work to out-bid each other to have their transactions included and make money. This is similar to what solvers do on CoW Protocol. The difference, of course, is that searchers benefit validators while solvers benefit users.
Why Become a Solver?
The fundamental difference between searchers and solvers is that searchers extract value from user transactions while solvers add value to them.
MEV may be a profitable enterprise in the short-term, but it hurts users and makes for a more toxic ecosystem. This turns potential new entrants away, feeding a vicious cycle — after all if there are no users left, who will searchers make money off of?
Solvers are the opposite: they take the same tech but they leverage it for the benefit of users. This cycle is virtuous, rather than toxic. Users achieve better prices, so they’re incentivized to use the product more, which means more order flow and better compensation for solvers.
From a technical standpoint, the methods searchers use to find arbitrage opportunities can be used to instead find solutions to batches. Searchers can leverage their existing nodes, algorithms, servers, AMM-indexed liquidity, simulation services, and more to become a good solver. This means that the lift to turn a searcher into a solver is relatively minor, while the upside is significant.
Who can be a Solver?
CoW Protocol was the first DEX to implement intent-based trading, a model that the entire DeFi industry is now moving towards. This means that opportunities for solvers will only grow in the coming years.
Thanks to a permissionless structure, anyone can become a solver. The main requirement is to put up a bond which serves as a guarantee that the solver will follow the rules or risk getting slashed.
Solvers that do well find good solutions to the batch auction problem. They also generally:
- Develop an efficient optimization algorithm
- Identify and solve special problem instances that are easy to solve
- Consider diverse liquidity sources
- Integrate external market makers
How to Become a Solver
Transforming a searcher setup into a solver setup or writing a new solver takes some technical expertise. We won’t go into it in this article, but you can find the requirements and specifications for becoming a solver in the CoW Protocol solver documentation.
We also answer questions and provide technical support through the CoW Protocol Discord.
Happy solving!
