Cole Petersen · 5 hours ago · 2 min read · Insights via Glassnode IntoTheBlock
Manipulation rampant on decentralized crypto exchanges says latest research
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Multiple cases of “Flash Boys” type automated trading bots have been found working on decentralized exchanges. According to researchers from Cornell Tech, the aggressive market strategies employed by these bots enable manipulative practices that could significantly damage ordinary trading.
Cornell Tech Research Paper Discovers Manipulative Trading Practices on Decentralized Exchanges
While decentralized exchanges have been touted as the future of cryptocurrency trading, recent research suggests that DEXs could be as prone to manipulation as Wall Street once was. According to the paper from researchers at Cornell Tech—and several other universities, including the University of Illinois and ETH Zurich—Flash Boys-like trading manipulation (referencing the New York Times Best Selling book, Flash Boys: A Wall Street Revolution) is rampant on these exchanges.
These arbitrage bots are being used in manipulative profit-making strategies, Bloomberg reported, as it lets users trade “more directly.”
The report explained that companies that employ these trading programs pay higher fees in order to get “priority orders.” This enables them to participate in (illegal in the traditional financial markets) practices such as front running, where traders can see other orders and push the ones they made to the front-of-the-line.
“We have no idea what the extent of the malfeasance is on centralized exchanges,” he said in a presentation last week during a blockchain conference at Cornell Tech’s New York City campus. “If we extrapolate from what we’ve seen on DEXs, it could well be on the order of billions of dollars.”
Arbitrage Bots Could Compromise the Integrity of Entire Crypto Market
Cornell Tech’s research is the latest red flag for the cryptocurrency markets, Bloomberg said, as it follows a recent report that found more than 90 percent of trading volume at the world’s largest crypto exchanges was “questionable,” likely referencing Bitwise’s report on widespread cryptocurrency wash trading.
Cornell’s report explained that these arbitrage bots represent a significant flaw in the design of decentralized exchanges. A flaw that has the potential to threaten the integrity of the underlying blockchain in these cases.
These type of trading bots engages in serious market-exploiting behaviors, including front running, latency optimization, etc. These practices are still seen on Wall Street, the paper’s authors said, and they resemble the notorious “Flash Boys” bots which attracted the ire of regulators.
Researchers managed to spot more than 500 bots on just 6 decentralized exchanges. Tracking the exchanges in real time since October 2018 led the researchers to conclude that these bots made up to $20,000 of daily trading volume via such activities, Philip Daian, the lead author of the Cornell Tech paper, said. Considering the much smaller volumes on decentralized exchanges this amount is significant.
Swiss-based Bancor, one of the six DEXs where trading bots were discovered, said that it has features that “neutralize” threats of bot manipulation. Nate Hindman, the company’s director of communications, said that Bancor sets maximum gas prices in order to prevent attackers from bidding more to skip the line (front running).
Juels told Bloomberg that exposing these design flaws should incentivize companies to implement design changes to their exchanges. For those motivated, there are technical and financial solutions to curtailing manipulation—even on decentralized exchanges.