'Trading Bots' Are 'Exploiting Inefficiencies' on Crypto Exchanges

Homeland Security Newswire has published a blog post in which it has issued a warning regarding arbitrage bots which have reportedly been exploiting various “inefficiencies” on decentralized cryptoasset exchanges (DEXs).

According to recent research conducted at Cornell University, cryptocurrency exchanges are being targeted by “predatory users,” who are making quick profits from daily trading. The malicious users have been “siphoning millions or possibly billions of dollars a year in cryptocurrency,” the report revealed.

“Bots Exploiting Inefficiencies” On Decentralized Exchanges

As noted by Homeland Security, certain crypto transactions have been given priority over others, because high fees were paid to process them. The publication's website stated:

Like high-frequency traders on Wall Street, a growing army of bots exploit inefficiencies in decentralized exchanges, which are places where users buy, sell or trade cryptocurrency independent of a central authority … [these trading platforms carry out] transactions [which] pose a security threat to the entire blockchain.

Researchers at Cornell conducted an 18-month study which mainly involved examining the trading activity on six different (and unnamed) DEXs. The study found that bots had been taking advantage of the time delays on the crypto trading platforms to perform trades that would not have been possible for human traders to conduct.

Philip Daian, a computer science Phd student at Cornell and the author of the study, noted that traditional trading platforms involve brokers or a middleman to establish trust and settle transactions between two parties. However, peer-to-peer (P2P) or decentralized trading platforms usually do not require an intermediary as blockchain technology acts “like a trusted third party,” Daian said.

He also pointed out that “in reality, there are a lot of different moving parts in the blockchain that can be manipulated.” Because of multiple factors that can potentially affect cryptocurrency transfers, Daian recommends being “very careful about what the blockchain is actually giving” us, in terms of the types of transactions taking place.

According to Daian, cryptocurrency mining pools have “tremendous” power and control over which transactions will be processed. This, he explained, “makes the entire system vulnerable, or they may even rewrite blockchain history to steal funds already allocated by smart contracts.”

Improved Security And Design Could Prevent Exploitative Activity

He acknowledged that having many different miners securing a blockchain “could be good” in “some systems, but it doesn’t guarantee that your trades are going to be fair.”

Although the Cornell study only involved decentralized, or non-custodial exchanges, the research team believes the same manipulative tactics may be applied on centralized crypto trading platforms, although it is unclear as to exactly how the same tactics could be employed.

In order to prevent malicious traders from exploiting crypto exchanges, Daian suggested increasing the level of security offered on platforms. He remarked:

If you use a cheap bank vault to store your expensive pile of gold, it will be more attractive for someone to break into it. A lot of users are trading on these exchanges and having experiences that are not as good as they could be if the exchanges were designed better.