A Short Story of UNISWAP and UNI Token. DEFI Explained
Uniswap Devaluates DeFi Tokens.
We tell what is happening
Research indicates the centralized nature of routing on Uniswap
Trades are routed to six arbitrage trading pairs
Vampire bots make money on the price difference
According to the latest research, Uniswap may be involved in the massive devaluation of DeFi tokens. The protocol directs trades through preferred liquidity pools.
The DFOhub protocol team recently investigated and found that Uniswap is centralized in nature, allowing “vampire arbitrage bots” to dump the prices of certain DeFi tokens. Experts are confident that trading bots configured to arbitrage between tokens provoke distortions and problems in the market.
“Uniswap routing – unintentionally – not only prevents certain projects from growing, but actually reduces their value.”.
The report also explains that the token routing process on Uniswap does not scan all liquidity pools, but prioritizes pairs pegged to just six tokens. These include WETH, DAI, USDC, USDT, COMP and MKR.
They are called Uniswap arbiters.
The project experts added that this process is hardcoded into the Uniswap code to ensure that the prices of these tokens are in sync with each other, but not in any other pair..
Essentially, the router will bypass highly liquid pairs excluding those six preferred tokens, even if they generate more profit..
In the course of the study, it turned out that normal transactions occur only between pairs pegged to these six tokens, and prices change only within these pairs, which provokes price differences between them..
“Arbitrage bots attack, taking advantage of exchange rate differences, devalue tokens and receive free ETH”.
The study provides an example of how arbitrage bots can irrevocably siphon ETH from pools outside of these six tokens..
What can be done
DFOhub co-author Alessandro Mario Lagana Tosca, who wrote the report, said the Uniswap team needed to take this issue seriously..
He offers to rollback to Uniswap v1, where all transactions went through ETH only. However, this idea is unlikely to be received with enthusiasm. Another option is to counteract arbitrage by installing another bot on the system.
A similar solution, tentatively titled QuickScope, is currently being developed by the DFOhub team..
The first version was unsuccessful, as vampire bots make money from microtransactions, spending, for example, $ 5 in ETH to earn $ 8, and using a Solidity feature called “Delegate Call”, which reduces gas fees. The QuickScope v2 bot is currently under development and is being tested by the team.
DFOhub looks forward to working with Uniswap to help solve this problem by siphoning ETH from protocols and devaluing tokens on the world’s most popular DEX.
All information, contained on our website, published on the principles of good faith and objectivity, and for informational purposes only. The reader bears himself full responsibility for any actions, committed by him on the basis of information, obtained from our website.