Abstract:

Cryptocurrencies and blockchains are often heralded as the keys to a new era of financial transparency and fairness. Decentralized exchanges (DEXes), in particular, run directly on blockchains. They manage custody of traded assets, preventing theft by exchange operators, and provide a globally visible and accessible trading platform that seems egalitarian.

Our research, though, has revealed that DEXes are in rife with Wall-Street-like manipulation—and worse. Arbitrage bots, automated trading programs written as smart contracts, continuously exploit DEXes to profit at the expense of ordinary users. I’ll talk about the increasingly sophisticated strategies used by arbitrage bots, where their gains come from, and how game-theoretic modeling closely reflects their real-world behavior. I’ll also recount their rise as an inadvertent side-effect of our research.

DEX arbitrage doesn’t just impact DEX users, but is suggestive of widespread malfeasance in cryptocurrency exchanges and also poses an unexpected, systemic threat to the foundational stability of blockchains such as Ethereum today.