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PulseX is the native decentralized exchange (DEX) of PulseChain, operating similarly to Uniswap V2 but with added features of staking and farming borrowed from BNB’s PanCake Swap. It has the thickest liquidity on Pulsechain, a deflationary tokenomics model, and mechanisms like buy and burn to ensure long-term value appreciation of its native coin, PLSX. Arbitrage bots are part of almost every DEX, and there are advantages and disadvantages to having them on PulseX. Here, we explain what they are and how they work.
What are arbitrage bots?
Arbitrage bots are scripts or automated trading programs that exploit price differences of the same asset across different markets or liquidity pools. They buy the cryptocurrency at a lower price on one exchange and sell it at a higher price on another exchange, making a profit from the price difference.
This continuous lookout for price difference and execution of trades on decentralized exchanges like Uniswap, PulseX, and others leads mainly to establishing a price equilibrium but also poses challenges related to Miner Extractable Value (MEV) and fair trade execution. There are other pros and cons to take into consideration as well, so it’s important to understand how they work and why they’re there.
How arbitrage bots work
- Price monitoring – arbitrage bots continuously scan various DEXs for discrepancies in asset prices. For instance, if the price of a token is lower on Uniswap than on PulseX, the bot detects this difference. In a real-world scenario, this would be likely a trade between another PulseX DEX like 9mm or 9inch.
- Trade execution – once a profitable opportunity is identified, the bot quickly buys the token on the cheaper exchange and sells it on the more expensive one. This process is done almost instantaneously to minimize the risk of price changes.
- Profit generation – the profit is the difference between the buy price and the sell price, minus any transaction fees. The arbitrage bots are driven by profit. It is their main goal, and that’s how they feed.
Example of arbitrage trade
Imagine token A is priced at $10 on 9mm and $11 on PulseX. An arbitrage bot would:
- Buy token A on Uniswap for $10.
- Simultaneously sell token A on PulseX for $11.
- The profit is $1 per token, excluding transaction fees.
It’s obvious that all this can be done manually, but automation with scripts is so fast that a human rarely wins against a bot. There are losers in this game as well, and if it’s not you making a profit, you are likely the one to lose, but wait a minute with casting the stone. Let’s dive deeper into pros and cons.
Pros and cons of arbitrage bots
In AMMs like Uniswap and PulseX, prices of tokens are determined algorithmically based on the ratio of tokens in liquidity pools, and arbitrage bots help in price stabilization and liquidity efficiency.
By exploiting price differences, bots move tokens between pools, thereby balancing supply and demand, which stabilizes prices across different DEXs. For example, if the price of WETH is $3200 on PulseX and $3220 on 9inch, an arbitrage bot will buy ETH on PulseX and sell it on 9inch, making a profit from the price difference. This process continues until the price disparity is minimal, bringing the prices on both exchanges closer together. This can reduce short-term volatility.
By quickly addressing price imbalances, the bots help to smooth out sudden price changes, providing a more stable trading environment for other participants. If there’s a sudden drop in the price of a token on one DEX due to a large sell order, it can lead to panic selling. Arbitrage bots step in to buy the token at the lower price and sell it at a higher price elsewhere, mitigating the immediate drop and reducing volatility.
It is clear that it is the bots who gain the most out of these price discrepancies by thriving in this high volatility environment and using it to own means. So while average traders may prefer less risky trading conditions with more stable price and liquidity, bots use adverse conditions to generate maximum profit.
Arbitrage bots increase trading volume on DEXs by making frequent trades. This increased volume can lead to higher liquidity and more efficient price discovery. In these terms, the presence of bots on the PulseX DEX is a positive thing, as more trading volume leads to more fees for liquidity providers.
This, however, leads to higher gas fees for everyone else, as bots use a higher gas fee than the users to execute transactions faster, which in turn increases the gas for the users as well. Increased bot activity also leads to higher fees.
While high fees are a huge issue on a chain like Ethereum, it’s not as big on Pulsechain, which boasts 2400x cheaper gas fees.
The influence bots on PLSX and PLS
PulseX has a native coin, PLSX, which, unlike UNI, has a real utility rather than being just a governance token. PLSX has a total supply of 143T and a deflationary mechanism through the implementation of a buy and burn system. Each trade on the PulseX exchange contributes to this buy and burn, and for every $1B in volume, $600k of PLX is bought from the market and burned forever. At the time of writing, a total of $22 million has already been burned, which constitutes 0.66% of the entire supply.
Increased bots and exchange activity burns PLSX faster, so it’s easy to see a benefit for PLSX holders. Their activity extends its effect on PLS, as well as every transaction burns gas, leading to a reduction in a reduction in PLS supply.
Issues with Miner Extractable Value (MEV)
There are many advantages to having arbitrage bots on a network, especially for the owners; however, the bots can front-run regular users, leading to less favorable prices for manual trades. The validators themselves often run such arbitrage bots extracting value from transaction fees and arbitrage opportunities within a block. This value comes from reordering, including, or excluding transactions in a block.
There are different types of MEV, and they include:
- Front-running: inserting a transaction ahead of a pending transaction to exploit price changes.
- Back-running: placing a transaction right after a large trade to benefit from the resulting price movement.
- Sandwich attacks: placing one transaction before and another after a target transaction to exploit the price impact.
MEV is possible because validators can see all pending transactions in the mempool. By reordering these transactions, they can maximize their profit at the expense of regular users. For example, a user submits a large buy order on PulseX. A validator places a buy order just before the user’s order and a sell order immediately after, which turns in profits from the price increase caused by the user’s buy order. It’s called MEV because the validator can effectively extract value by reordering, including, or excluding transactions within blocks. Arbitrage bots contribute to MEV by paying higher gas fees to prioritize their transactions.
Mitigation to bots
Solutions like Piteas aggregator, integrated into PulseX and other Pulsechain DEXs, aim to reduce MEV risks by aggregating liquidity from multiple sources and constructing optimal trade routes. This minimizes the chances of fron-running and sandwich attacks.
The main engine of the Piteas platform is their Pathfinder, which is an innovative routing algorithm that finds the optimal swap route for each trade, ensuring users receive the maximum return.
Another solution is to use limit orders on Uniswap V3, which is implemented into the 9mm DEX. This is something a user on Pulsechain can do already now. Submitting private transactions whose content is invisible to validators in the mempool and only the gas bid is known is yet another solution that is unavailable on Pulsechain and is commonly known as flashbots.
Conclusion
PulseX, with its innovative features like lower fees, deep liquidity, and deflationary tokenomics, offers significant advantages over traditional DEXs like Uniswap. By leveraging arbitrage bots effectively, PulseX ensures price equilibrium across its liquidity pools, providing a fair and efficient trading platform for users. For users who feel like the value is extracted from them, there are other ways of transacting on Pulsechain that can mitigate the negative effects of arbitrage bots.
