Basically when somebody makes a pricing error on a decentralized cryptocurrency exchange there's a mob of automated arbitrage bots that try to trade against it. Who wins and actually gets to make the trade is mainly determined by how high of a transaction fee your bot is willing to pay.
You can win instantly by offering to trade with a transaction fee so high it almost wipes out all but a cent or two of the entire arbitrage profits, because nobody else will pay a higher fee.
Instead what happens is bots offer the lowest possible fee, then immediately increase their fee as soon as they see a competing bot try to take the trade with a higher fee. This results in the bot offering the highest fee changing every several milliseconds as the fee quickly grows.
The way Ethereum mining works, this results in the winning bot being randomly selected from among the set of bots "bidding" up the transaction fee: blocks are mined at random intervals of iirc about 20 seconds, and whoever had the highest bid at the time the next block is mined wins. <20 seconds of bidding is short enough that even with the bidding, the transaction fee doesn't get bid up particularly high, and the winner makes out with a highly profitable arbitrage trade.
By giving up a guaranteed win and instead rolling the dice against other bots, transaction fees stay low and everyone has a higher expected profit. It's coordination that happens without any communication between the participants and quite possibly the participants didn't realize they were in effect cooperating when they added the high speed bidding behavior to their bots.
> You can win instantly by offering to trade with a transaction fee so high it almost wipes out all but a cent or two of the entire arbitrage profits, because nobody else will pay a higher fee
This is like 1980s sawtooth algos in real finance.
A lot of crypto is former HF folks taking old strategies to a dumber field.
I have really enjoyed watching crypto act like they are white knights against the evil traditional financial system and then go on to reinvent it piece by piece.
That isnt cooperation. That is basic market principals in action. Bid and counter bids that whittle down the profit margin based on willingness to risk a win/loss? These are auction principals as old as time. This is reaction rather than cooperation.
Reminds me of the extremely interesting paper https://arxiv.org/abs/1904.05234 Flash Boys 2.0
Basically when somebody makes a pricing error on a decentralized cryptocurrency exchange there's a mob of automated arbitrage bots that try to trade against it. Who wins and actually gets to make the trade is mainly determined by how high of a transaction fee your bot is willing to pay.
You can win instantly by offering to trade with a transaction fee so high it almost wipes out all but a cent or two of the entire arbitrage profits, because nobody else will pay a higher fee.
Instead what happens is bots offer the lowest possible fee, then immediately increase their fee as soon as they see a competing bot try to take the trade with a higher fee. This results in the bot offering the highest fee changing every several milliseconds as the fee quickly grows.
The way Ethereum mining works, this results in the winning bot being randomly selected from among the set of bots "bidding" up the transaction fee: blocks are mined at random intervals of iirc about 20 seconds, and whoever had the highest bid at the time the next block is mined wins. <20 seconds of bidding is short enough that even with the bidding, the transaction fee doesn't get bid up particularly high, and the winner makes out with a highly profitable arbitrage trade.
By giving up a guaranteed win and instead rolling the dice against other bots, transaction fees stay low and everyone has a higher expected profit. It's coordination that happens without any communication between the participants and quite possibly the participants didn't realize they were in effect cooperating when they added the high speed bidding behavior to their bots.
> You can win instantly by offering to trade with a transaction fee so high it almost wipes out all but a cent or two of the entire arbitrage profits, because nobody else will pay a higher fee
This is like 1980s sawtooth algos in real finance.
A lot of crypto is former HF folks taking old strategies to a dumber field.
I have really enjoyed watching crypto act like they are white knights against the evil traditional financial system and then go on to reinvent it piece by piece.
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That isnt cooperation. That is basic market principals in action. Bid and counter bids that whittle down the profit margin based on willingness to risk a win/loss? These are auction principals as old as time. This is reaction rather than cooperation.