Cornell Tech Research: Dangerous Arbitrage Bots Are Exploiting Decentralized Exchanges
There is a new trend in the market. People are using arbitrage bots to exploit innefficiencies in decentralized exchanges (DEX) in order to get more profit. This was originally reported by Homeland Security News Wire, which used research from Cornell Tech in order to affirm that some “predatory users” were profiting from these exchanges this way.
According to this article, these users are basically acting like the high-frequency traders of Wall Street. They use the bots and large fees to prioritize certain transactions, which was understood as a “security threat” to the blockchains in which they were trading.
The researchers spent around a year and a half researching these bots on six unnamed decentralized exchanges and they actually found out that by paying the high fees, they are able to exploit the innefficiencies of the system and to optimize their own network latency to antecipate what is happening in the market.
By exploiting the time delays, they will be faster than any human and have this “unfair” advantage.
Philip Daian, the author of the study, affirmed that brokers can be used to block this kind of action in the more traditional trading system because they are also human. In decentralized systems, however, you replace the broker with the blockchain.
While the blockchain looks like a trustworthy party, the truth is that there are several ways in which you can manipulate it if the developers were not very careful while building the structure. According to Daian, you actually have to be very careful with what the blockchain is actually giving you.
He also affirmed that miners are very powerful, especially because they can choose what to mine or not, depending on prioritizing certain fees. This, according to him, makes the entire system very vulnerable and it may even allow smaller blockchains to be rewritten by smart contracts.
However, in order to do it, miners would need to orquestrate a 51% attack first, which is something that is notoriously hard to pull off. Despite that, many attacks were done last year, especially in small communities.
The study concludes by affirming that even centralized exchanges might be affected by this kind of trading and that the blockchain market has to become more aware of it.