New version — Flash Trade on swaps.io (demo)
Trading crypto assets can be complex and time-consuming due to the highly volatile nature of these assets and the constantly changing liquidity. Both make it challenging for traders, market makers, and other market participants to make quick and informed decisions. However, using bots can help simplify the trading process by analyzing information, identifying profit opportunities, and taking advantage of them.
Let's take a closer look at professional market makers, the benefits of using smart bots, and explore the concept of cross-domain MEV.
Market makers are crucial for the crypto market, whether centralized or decentralized. They act as both buyers and sellers of tokens or coins, offering liquidity for specific crypto pairs throughout the trading day and thus ensuring a quick exchange process and adequate rates.
Initially, market makers were mainly large crypto companies or high-net-worth professional traders. In addition, some Exchanges often acted as market makers themselves to avoid relying on third parties for a steady exchange process. But as the crypto industry progressed, new opportunities for individuals and smaller companies to participate in market-making emerged. Decentralized projects began to create solutions that encouraged more users and traders to provide liquidity, redirecting it from centralized exchanges.
While facilitating orders is essential for a stable market, market makers are primarily motivated by profit. There are multiple ways market makers can earn profits. They may charge a small fee for their services and the risk they take by purchasing and holding assets that may decrease in value before the resale opportunity arises. Additionally, they may engage in arbitrage trading, which is arguably the primary motivation to work in DeFi, as arbitrage opportunities tend to be more long-lasting and advantageous there. Lastly, many exchanges offer various financial incentives, such as reduced trading fees, rebates, or LP tokens that can be used for different DeFi services.
Therefore, market-making not only helps to support exchange flow and offers users a seamless experience but also has excellent earning potential.
Blockchain transactions often face delays that some users can exploit to gain an unfair advantage. When a user submits a transaction, it waits for confirmation in the mempool before being validated. Mempool is a storage mechanism for unconfirmed transactions used by cryptocurrency nodes that allows them to remember transactions not yet included in a block (short for memory pool). Validators select transactions from the mempool and naturally prioritize those with the highest fees. However, they can manipulate the order of transactions beyond that.
Maximal Extractable Value (MEV) refers to the profit miners, validators, sequencers, or other network workers can earn by manipulating transactions within the blocks they create. While it can result in more revenue, it also presents possible risks and challenges to network security, fairness, and stability.
In recent years, MEV has become an increasingly popular topic, partly due to the growing number of users seeking profit and the popularity of DeFi platforms that facilitate complex cross-chain transactions across blockchain ecosystems. As the number and complexity of transactions on DeFi platforms increase, so does the potential for individuals to exploit them.
MEV attacks can take several forms, including transaction reordering, transaction censorship (blocking certain transactions from being processed on a blockchain), fee extraction (manipulating fees charged for processing transactions to increase profit), and front-running (placing your orders before existing orders to exploit them), among the most common ones.
Cross-domain MEV is a new but crucial concept for market makers operating in the DeFi space. In the crypto industry, a domain refers to an independent system with a shared global state modified by different players through transactions. Domains can include blockchains, Layer-2 networks, side-chains, and centralized exchange, and profit opportunities arise from the differences in asset prices across them. Those who can influence the order in which transactions are processed can exploit these opportunities the best.
Imagine a platform that uses automated market makers (AMMs) in multiple domains. The likelihood of liquidity pools representing the same asset pairs in each domain but with different volumes, depths, and levels of trading activity increases. When pools for the same asset pairs are not identical, it creates a perfect arbitrage opportunity.
Identifying these opportunities manually can be challenging. Therefore, traders and market makers often use bots to help them navigate the process. Bots search for profitable opportunities across domains using complex algorithms and place orders automatically, making it easier for traders to make a profit.
However, due to intense competition, traders need to continuously improve their bots to stay ahead of others and generate profits before their competitors.
With the recent advances in Artificial Intelligence (AI), traders have become increasingly interested in exploring the possibilities of incorporating AI-powered technologies into their bots. Unlike traditional bots, which rely on pre-set rules and algorithms determined by humans, AI-powered trading bots are not limited by such constraints. They can analyze new information from, for example, news sites or social media platforms and adjust their trading strategies to maximize profits. Furthermore, AI bots can learn from their trading histories, continuously improving their predictions and strategies by testing them in real-market conditions. The use of more complex algorithms, such as neural networks, enables AI bots to identify patterns and relationships that may not be detectable to humans. As a result, AI-powered bots can become invaluable assistants to traders. To learn more about AI-powered bots, read this post.
Smart bots can be incredibly useful for market makers, as they can help maintain liquidity, fill orders, and take advantage of quickly emerging and disappearing profit opportunities. With the help of Artificial Intelligence, these bots can analyze the market, develop trading strategies, and learn from history and other traders, thereby optimizing their own performance. In short, smart bots have the potential to become excellent helpers for market participants, including market makers.
The team at Kinetex is planning to develop cutting-edge AI technologies to design solutions for automated market makers. One of these solutions will be smart bots that can analyze the market and adapt to ever-changing trends in a timely manner. These bots will be self-learning, so Kinetex resolvers will be able to perform transactions automatically, providing users with the fastest execution times and most profitable rates.
Kinetex Network: Website | Kinetex dApp
