Bot Activity on Decentralized Exchanges

Key Insights

• Automated trading programs, or bots, automatically execute trades on their creator’s behalf and typically employ arbitrage or directional trading strategies.
• Uniswap V3 has about twice as many high-frequency trading bots across its Ethereum, Polygon, and Arbitrum deployments compared to the corresponding deployment of SushiSwap, but they make up a much smaller percentage of the total user base.
• Less liquid trading environments, like DEXs on Layer-2 scaling solutions, tend to attract more bots as a result of increased arbitrage opportunities.
• During periods of extreme market volatility, such as black swan events, arbitrage bots and sandwich attacks are more prevalent in the Ethereum ecosystem.

Decentralized exchanges (DEXs) allow users to trade cryptocurrencies without any centralized intermediaries, as most of them are built on open-sourced, smart contracts. They come in two general flavors: automated market makers (AMMs) and order book type exchanges.

AMM exchanges use passive liquidity from liquidity pools to enable peer-to-peer trading. Order book exchanges are built like traditional equity exchanges. Instead of processing all transactions automatically through liquidity pools, like AMMs, they rely on third-party buy and sell requests to fill orders. Most DEXs built on Ethereum to date are AMM-based exchanges. Uniswap has dominated spot trading volume market share since inception as a result of constant improvements and first mover advantage as one of the first AMM exchanges.