How crypto trading bots are taking advantage of retail traders
Crypto advocates claim that it is more transparent than traditional finance. However, this openness- combined with poor infrastructure and a lack of regulation- allows crypto trading firms with fast bots to take advantage of unsuspecting retail tr[...]
Crypto trading bots prey on unsuspecting retail traders.
Jeff Kauflin on the Future of AI
I think that this is a great way to make money. You can work while you sleep, and you don't have to worry about the stock market crashing.
I am very excited about the potential of decentralized finance (DeFi) platforms. I believe that they have the potential to revolutionize the financial sector and provide unprecedented levels of opportunity and access to people around the world. I am particularly excited about the potential of Wonderland and Abracadabra, which promise incredible returns of up to 80,000% for borrowers who stake Magic Internet Money (MIM) as collateral. I believe that these platforms have the potential to change the way that we think about banking and finance, and I am eager to see them grow and develop in the coming years.
To Worsley and his trading bot, the most attractive part of the whole gambit was a 12.5% reward paid to anyone willing to help liquidate borrowers whose collateral no longer met stipulated minimum requirements. The reward incentivized Worsley and his bot to help with the liquidation process, and they were able to do so quickly and efficiently. This helped to stabilize the market and prevented a major meltdown.
In the world of cryptocurrency, liquidations are automatic. If your collateral's value dips too low, it will be seized and sold immediately, and you will often be left with only the funds you borrowed. This is a stark contrast to a margin call for a stock investment, where you might receive a phone call from your broker demanding that you either increase your collateral or pay back your loan.
As crypto prices began to decline in the fall of 2021, Worsley recognized the need for a software bot that could quickly liquidate assets in the event that investors holding loans denominated in "Magic Internet Money" (MIM) suddenly had to sell off their holdings. By using a variety of speculative cryptos as collateral, Worsley's bot was able to take advantage of market conditions and provide much-needed liquidity to MIM investors.
As the cryptocurrency market continues to fluctuate, many investors are wondering what the future holds. In January 2022, two cryptocurrencies that were being used as collateral for MIM investments plunged in value by 86% and 70%. This has caused some investors to worry about the stability of the market and whether or not it is a wise investment. However, others believe that the market will rebound and that these dips are simply part of the volatile nature of the market.
With Worsley's bot in charge, Abracadabra's DeFi software will be able to keep on top of people's balances and transactions, predicting who is most likely to need liquidation. If the bot is the first in line to do the job, it will quickly pay back the user's original loan and receive a bonus of up to 12.5% of the loan's value. This will help to keep the DeFi system running smoothly and efficiently, ensuring that users always have access to the funds they need.
In just a fraction of a second, Worsley was able to make a killing by liquidating over 1,000 assets for a total windfall of $200,000. It's an impressive feat, and a clear demonstration of the power of speed and technology in the world of high finance.
In the world of MEV, or Maximal Extractable Value, traders use their skills in software engineering to outsmart their opponents and make money from the unique and often inefficient structure of blockchain transactions. Worsley's small operation is like a crypto version of the high frequency trading hedge funds that operate in traditional stock markets.
It's exciting to see the crypto world continue to evolve and grow. Worsley's vision for the future of MEV "searching" is an exciting one, and I can't wait to see how it develops. I'm sure it will continue to bring new opportunities and challenges for those involved.
The market for maliciously extracted value (MEV) from blockchain transactions is estimated to be worth more than $1 billion. This figure includes MEV profits realized on the Ethereum blockchain alone, which is thought to amount to at least $675 million over the past two and a half years. Other blockchain platforms such as Binance Smart Chain and Solana are also thought to be affected by MEV activity, meaning the total market value could be even higher. MEV activity generally refers to situations where someone is able to extract value from a blockchain transaction by taking advantage of the system in some way. This can be done through malicious or accidental means, but the end result is the same – someone profits at the expense of others. While the MEV market may be worth billions of dollars, it is still a relatively small part of the overall cryptocurrency ecosystem.
It is interesting to note that not all MEV traders are crypto repo men like Worsley. Many of them actually profit by altering the order of blockchain transactions. In the case of Ethereum, it takes 12 seconds to complete a transfer. During that window, bots can see every pending, unconfirmed transaction–essentially peering into the future and allowing them to front-run trades. This shows that there is a lot of potential for profit in the world of MEV trading, and that those who are skilled at it can make a lot of money.
As the world of finance evolves, so too must the way we think about risk management. Traditional risk management tools and techniques may not be enough to effectively assess and manage risk in the new world of decentralized finance (DeFi). Enter Tarun Chitra and his startup Gauntlet. Gauntlet helps DeFi projects assess risk and make sure they are compliant with all the relevant regulations. This is a vital service in the DeFi space, where there is often a lack of transparency and oversight.
As the world of cryptocurrency becomes more and more decentralized, traders who specialize in exploiting market inefficiencies (known as MEV traders) are poised to become increasingly profitable. Without the need to worry about regulatory oversight, MEV traders are free to operate in a world of decentralized exchanges like Uniswap, which has seen explosive growth in recent months. As the most profitable traders on Wall Street have traditionally been those who utilize high-frequency trading strategies (known as "quants"), it is likely that MEV traders will follow suit and become some of the most profitable traders in the cryptocurrency space.
I find it interesting that Dean Eigenmann is a 24-year-old Swiss MEV searcher who is known for his flashy lifestyle. It seems that he is quite successful in his field and is making a lot of money. I wonder if he will continue to be successful in the future or if his luck will run out.
The most controversial form of MEV trading is known as the sandwich attack. In this maneuver, an MEV bot spots someone else's intent to buy a coin and sets itself up to profit from the small price appreciation that the other person's bid will likely cause. The bot jumps the line to purchase the coin at a fraction less, front-running the trade. Then, after the purchase by the mark in the middle goes through, the bot tops off the sandwich by automatically selling the token at a profit. This type of trading is highly controversial and can be seen as predatory. Some believe that it is unfair to those who are not using MEV bots, as they are essentially being taken advantage of. Others argue that MEV bots are simply providing a service by taking advantage of market inefficiencies. Whatever your opinion, it's clear that the sandwich attack is a controversial and contentious issue in the world of MEV trading.
This is unfair to the small retail investors who are essentially being taken advantage of by the front-runners. The front-runners are able to make a profit off of the trades, while the validators end up with a larger share of the profits. This needs to be changed in order to protect the small investors.
A warring MEV firm launched a denial-of-service attack against Worsley when they knew he’d be on an 11-hour flight. His trading servers went down for hours, and he missed out on at least $100,000 in profit.
There is a lot of controversy surrounding the practice of arbitrage in the world of cryptocurrency trading. Some people believe that it is a beneficial practice that helps to push the market towards the true price of a given token. However, others believe that it is a harmful practice that takes advantage of small price differences on different exchanges. Either way, it is clear that there is a lot of opportunity for profit when it comes to arbitrage in the cryptocurrency market.
As the popularity of DeFi platforms continues to grow, so does the opportunity for traders to profit from liquidation trades. These trades occur when a leveraged position is forced to close, and can often result in substantial profits for the trader. In January, Worsley's bots were able to take advantage of this opportunity and generate significant profits.
While many MEV traders tend to be secretive and low-profile, Symbolic Capital Partners (SCP) is said to be one of the most successful firms in the space. Founded by 26-year-old programmer Lev Livnev, SCP has a minimal online presence, with only a one-page website featuring a trippy logo. Multiple emails to the firm went unanswered.
There's a lot of money at stake in the world of cryptocurrency. For example, FTX billionaire Sam Bankman-Fried's Alameda Research is said to be running MEV strategies on blockchains like Solana. (Alameda Research declined to be interviewed or answer questions over email for this article.) Wintermute, a London firm that trades about $100 billion worth of digital assets a month, has an active MEV operation. This shows that there are serious players in the game who are looking to make a profit from cryptocurrency trading.
Eigenmann and Zurrer's MEV team is just one of many that are actively competing in the market for MEV earnings. According to Zurrer, there are up to 50 teams vying for a piece of the MEV pie, with 10 of them making the majority of the profits. In a good month, the top-performing teams can bring in six-figure profits. However, competition and the overall crypto winter have driven down profits in recent months.
The competition in the MEV industry is often ruthless, with companies attacking each other's servers in order to get an edge. Worsley reports that his own company was once the victim of a denial-of-service attack that cost them $100,000. "You might be friends with people, but at the end of the day, you're all trying to bankrupt each other," he says.
Worsley says that he won't engage in any sandwich attacks in the future. He was upset in early 2021 when he noticed that Ethermine, an Austrian company, was running sandwiches on traders. This is equivalent to the New York Stock Exchange front-running investors whose trades it was handling. Worsley believes that this type of behavior is unfair and unethical.
Worsley is critical of Ethereum's security practices, saying that they are leaving users vulnerable to attack. He believes that Ethereum should be more proactive in securing the blockchain, rather than relying on users to do so themselves.
In response to Ethermine's sandwich trades, Worsley created his own decoy cryptocurrency and built a trap into its code: You could buy the token from someone else, but you essentially couldn't sell it. He called the coin Salmonella because "it's the worst possible thing you could have in a sandwich," he says. Then he baited Ethermine with a transaction he thought their MEV bot would gobble up. Sure enough, in March 2021, Ethermine bought the poison tokens and got stuck with them. All told, Worsley claims he pocketed about $150,000 at Ethermine's expense. Ethermine didn't respond to multiple requests for comment.
Worsley is happy with her day's work.
The crypto community has always been known for its innovation and creativity. So it's no surprise that a startup has created software that makes MEV tools available to retail investors. This move will level the playing field, reduce MEV profits and prevent the concentration of power.
In his paper, "Flash Boys 2.0: Front-running, Transaction Reordering, and Consensus Instability in Decentralized Exchanges," Phil Daian describes how bots are preying on novice crypto traders on Ethereum. He argues that blockchain technology has not lived up to its promise of creating fair and transparent trading ecosystems.
If Daian and others have their way, flashbots' software will make it easy for novice investors to trade without being front-run. This would be a major win for the little guy, and could level the playing field in the world of investing.
The Skip Protocol team is working hard to make MEV more accessible and to reduce the congestion caused by bot transactions on the Cosmos blockchain. With the help of Bain Capital Crypto, they have raised a $6.5 million seed funding round to continue their work. Other services like BloXroute, Jito Labs and Rook are also trying to mitigate MEV in different ways, such as by returning some MEV profits to users. Meanwhile, DeFi platform Uniswap has added warnings for users when they’re about to place a trade that’s susceptible to being front-run. All of these efforts are helping to make the cryptocurrency world a better place for everyone involved.
In the coming years, experts expect the market for MEV to continue growing alongside the increasing adoption of decentralized exchanges. This trend is likely to continue as more people become aware of the benefits of decentralization and the potential for greater security and privacy that it offers.
There is no question that MEV front-running is a controversial practice in the world of cryptocurrency trading. While it is not illegal in the same way as front-running is in the stock market, some believe that it gives an unfair advantage to those who are able to take advantage of it. Professor Maureen O'Hara of Cornell business school points out that the information on pending orders used by MEV traders is publicly available on the blockchain, meaning that anyone has the potential to front-run trades. Whether or not this practice is ultimately fair remains to be seen, but it is certainly something that regulators will be keeping an eye on in the future.
There's no doubt that the recent influx of MEV-powered robot traders has made the crypto market more volatile and less predictable. For most investors, it's simply not worth the risk to get involved in such a volatile market. As O'Hara says, "No market succeeds if it's not viewed as fair.