Trading manipulation, similar to “Flash Boys” is currently running rampant in digital currency exchanges, according to a new paper from researchers at Cornell Tech and other universities. These special arbitrage bots are profiting from the ordinary users’ trades and operate on decentralized exchanges.
What Do the Bots Do on Exchanges?
According to the report, the bots operate on decentralized exchanges where people trade directly. These arbitrage bots profits from ordinary users on decentralized exchanges as a firm using autonomous trading programs get priority by paying a higher fee. As a result of this, they get more advantage as they can see orders from other users and place their own orders first.
The eight authors of the paper write:
“We explain that DEX design flaws threaten underlying blockchain security. These bots exhibit many similar market-exploiting behaviors — front running, aggressive latency optimization, etc. — common on Wall Street, as revealed in the popular Michael Lewis expose ‘Flash Boys.”’
Decentralized exchanges are still not as big as centralized exchanges and do not hold a significant trading volume as well. However, their use is expected to grow as even top-of-the-line centralized exchanges like Binance are moving into this sector. The company is working on its own decentralized exchange, and several others are following suit.
Malpractices Are Still Rampant
According to Cornell Tech professor Ari Juels, the practice of special bot trading is not just rampant in decentralized but centralized exchanges as well. During a presentation at a blockchain conference in the university’s New York City campus, he said:
“We have no idea what the extent of the malfeasance is on centralized exchanges. If we extrapolate from what we’ve seen on DEXes, it could well be on the order of billions of dollars.”
In a phone interview with Bloomberg, Juels said that bots present a lucrative business and could even encourage a miner to launch a 51-percent attack. A recent report suspected that about 90 percent of the trade volume on digital exchanges is fake.