A piece of research conducted by scientists from world-renowned institutions has highlighted the extent to which bots are already running the show at decentralized crypto exchanges (DEXs) and gaining an advantage over human traders. The eight-strong team, from the likes of Cornell Tech, Carnegie Mellon University, and the University of Illinois, found that bots are taking advantage of the slower nature of DEXs to frontrun, reorder transactions, create consensus instability, and more in a system they state was designed to be fairer for the average user.
Flash Boys 2.0
The report, entitled Flash Boys 2.0 in a nod to the Michael Lewis book that tells the story of the extraordinary lengths gone to by Wall Street traders to gain millisecond advantages in algorithmic trading speeds, states that high frequency trading bots already rule the roost in DEXs, despite being fairly new on the scene. There are similarities between the two, they claim, stating that, “Like high-frequency traders on Wall Street, these bots exploit inefficiencies in DEXes, paying high transaction fees and optimizing network latency to frontrun, i.e., anticipate and exploit, ordinary users’ DEX trades.” However, the bots being deployed on DEXs are not the same type used by traditional high-frequency traders, in that they don’t race to conclude deals in the same way. Instead, DEX bots are tuned to “exploit inefficiencies in DEXes, paying high transaction fees and optimizing network latency to front-run trades”. These bots aim to outbid each other not in token price but, in the case of Ethereum-based exchanges, the price of ‘gas’, the portion of ETH paid to miners to process the transaction. A higher gas fee results in a quicker transaction, and these bots are tuned to outbid each other bid in “priority gas auctions”, leaving human traders out in the cold by comparison. Human traders can adjust their gas fees of course, but this has to be done manually, and therefore is a much slower process.
Increased Risk of Attack
The report also discusses how the high fees paid for priority transaction ordering via these gas priority auctions poses a systemic risk to consensus-layer security. These fees are an example of a general phenomenon the researchers label miner extractable value (MEV), which they claim poses a realistic threat to Ethereum’s future, through ‘undercutting attacks’ and ‘time bandit attacks’. The paper goes into these in much more detail, but essentially they become a reality when transaction fees overtake block reward fees, providing miners with more financial incentive to manipulate the blockchain rather than honestly verify it. This was considered a remote possibility in the future when block rewards would naturally decrease, but miners are already being presented with artificially increased transaction fees which results in the same phenomenon.
DEXs Facing a Troubled Future?
The news that bots are present on DEXs probably won’t come as a surprise to crypto traders, who are used to underhand practices and fake volume on exchanges. It does however go to show that decentralized exchanges will probably not prove to be the panacea to foul play that some assumed they might be, and may even lead to the downfall of the systems on which they operate.
