What are Bots in DeFi?

Oct 25, 2021 1 min read

Financial markets, both traditional and crypto, are extremely complex, chaotic and confusing. No single person has the capacity to stay on top of all the developments, price swings and opportunities that present themselves every day.

In order to cut through the noise, traders have been writing code to execute trading decisions on their behalf for decades. The autonomous programs which execute these decisions are known as bots; short for ‘robots’.

The models used to program a bot are varied and may focus on the technical analysis of price charts, specific trading signals defined by the trader, as well as strategies such as arbitrage or liquidations. The idea is that the bots give traders an edge over purely human operators. They can do this by improving speed, objectivity in decision-making, and the amount of data that can be analysed.

Given that cryptocurrency markets tend to be more volatile than traditional markets, the use of bots presents a greater opportunity for profit. Many trading bots are available to the public, while some require a paid subscription. There are also many open-source bots whose code is published online to be used and tweaked by anyone who is able to.

Bots can be a stabilising force in the market, keeping prices somewhat steady whilst also generating a profit through arbitrage. One example of this is Stake DAO’s Avalanche Arbitrage Strategy. Users can deposit into the strategy’s vault in order to fund the bot’s transactions, receiving a share of the profits in return.

While bots help traders maximise profit and also have an important role to play in the markets, they are also often used by bad actors. Given that all data on the blockchain is publicly available, it’s possible to use bots to scan pending transactions and submit a clone of a profitable transaction prior to the execution of the original (using a higher gas fee, in order to be processed first).

The process described above is known as frontrunning and is a problem as the original user who may have put in a lot of work to create an opportunity sees their profits stolen by a bot. Frontrunning is currently one of the major issues being actively combated by public-interest research organisations in the crypto space.

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