Try Quests to earn cryptoHave you ever wondered what trading bots actually do? What assets do they swap on Thorchain? Do they generate a large share of total trading activity? How many bots are there?
Read on if you want to get a good understanding of bot activity on Thorchain.
Incentives are what motivate all economic transactions. Investors use trading bots to profit from the bot's swapping activity.
How do bots make a profit?
For this article, bots are defined as addresses having completed more than ten swaps per minute at any point in the last 60 days.
Addresses that do not meet this definition will be labelled as humans.
Bots generate a profit from rebalancing the assets in trading pools. Thorchain Docs explains it best:
This bar chart counts daily swaps from bots and humans.
The majority of swaps on Thorchain are generated by bots.
>The average swap from bots is lower in value compared to the average swap from humans. Bots make 70% of all swaps but only 65% of swap volumes.
Starting on May 7th, there was an uptick in the share of swaps coming from bots.
Daily swap volumes (in USD) are show on the above bar chart.
Trading bots are responsible for a large portion of daily swap volumes on Thorchain.
There is some daily variation in the share of swap volumes coming from bots.
With all their trading activity, we can expect substantial swap fees paid by bots.
Swaps incur fees. These swap fees are paid to liquidity providers and to Thorchain node operators.
Shown above are daily swap fees (in USD) paid by bots and humans.
While bots generate 65% of total swap volumes, they only pay 28% of total swap fees.
Bots are able to pay lower swap fees compared to human traders. Presumably, lower swap fees result in greater profits for the bots.
Perhaps human traders do not factor in the cost of transactions in the same way that bots do. Humans might be willing to pay higher swap fees to enjoy the convenience of completing cross-chain native swaps on a decentralized protocol. Bots and humans may be using Thorchain for entirely different reasons.
How many addresses are considered bots?
In the last 60 days, there were 47 distinct addresses that were classified as bots. Bots are addresses that have completed more than 10 swaps per minute at least once during the last 60 days.
The vast majority of Thorchain swappers are humans.
In this second part, you will learn what blockchains and pools are most frequently used by trading bots.
This chart sorts daily swaps from bots sorted by blockchain. On most days, over 50% of swaps from bots use the BNB blockchain.
Human swappers use a greater variety of blockchains. Thorchain is their most frequently used blockchain, followed by BNB and Terra.
(note that there are a few days of missing Terra data in early May)
Bots show a preference for Binance, but what pools do they actually trade on?
In the last 60 days, 39% of swaps from Bots used the BUSD pool. The four most utilized pools are all Binance pools.
Bots make most of their swaps on Binance pools. Obviously this is because trading fees are lower on Binance than on Bitcoin or Ethereum. Bots will pay lower fees (and thus make greater profits) from trading wrapped ETH on Binance compared to buying it on Ethereum.
The BUSD pool is also the most popular with human users. However, in the last 60 days, humans frequently swapped on Terra and Bitcoin pools while bots preferred the BNB pools.
> In the last 60 days, forty-seven 'bot addresses' were responsible for 70% of swaps and 65% of swap volumes on Thorchain. These bots paid 28% of total swap fees on the network.
The above table ranks bot addresses by total swaps completed per pool. Many highly active bots are Binance addresses (starting with bnb...)
Shown in orange are swaps using the Thorchain blockchain. Swaps using Thorchain consist of either:
a) swaps to or from RUNE (i.e. USDC -> RUNE),
b) double swaps involving RUNE (i.e. USDC -> RUNE -> ETH), or
c) swaps involving synthetic assets hosted on Thorchain (i.e. Thor.ETH -> RUNE)
> Most bot swap activity takes place on the Binance Chain and on Thorchain.
The BUSD pool is the bot's most frequently used pool.
>Unbalanced pools represent a profit opportunity for arbitrage traders. If a trader can purchase a token at a lower price on THORChain and sell it for a profit elsewhere, they will. These trades re-balance the pool and ensure that prices accurately reflect the market value. These pool balancing trades happen 24/7 via arbitrage bots interacting with the protocol's API directly. It's even possible to run an arbitrage bot of your own!
Imagine a large swap takes place on the BTC-RUNE pool. The swap is a sale of BTC in exchange for RUNE. If the swap value is large enough, the pool will become imbalanced and the market value of BTC on Thorchain will be reduced.
A bot will capture this arbitrage opportunity by buying discounted BTC on Thorchain. In doing so they rebalance the assets in the pool.
Now, grab a cup of coffee and get ready for a deep dive into bot activity on Thorchain. You will learn:
- The total swap count and swap volume from bots,
- The total share of swap fees paid by bots,
- The total number of active bots on Thorchain,
- The blockchain and pools most frequently used by trading bots.
The period of observation is the last 60 days ending on May 13, 2022.
What have we learned about bot activity on Thorchain?
- Imbalanced pools create mispriced assets. Bots trade these mispriced assets to capture arbitrage opportunities. In doing so they rebalance the pools and correct the pricing of assets.
- Trading bots favor the Binance pools. Swapping wrapped ETH or BTC on Binance incurs lower fees compared to swapping on Ethereum or Bitcoin.
- Many highly active bots are Binance addresses. The rest are mostly Thorchain addresses.
- Bots are only a small minority of swappers on Thorchain.
- In the last 60 days, forty-seven bot addresses were responsible for 70% of swaps and 65% of swap volumes on Thorchain. These bots paid 28% of total swap fees on the network.
- Compared to the average swap originating from humans, the average bot swap is lower in value and costs substantially less fees.
Further research could investigate how bot addresses use the BUSD pool. It would be interesting to know if the BUSD pool presents arbitrage opportunities, or if it used to park money after swap trades are completed by the bots.
Another good research question would be to determine if bots trade synthetic assets more frequently compared to normal human swappers.
Bots are defined as addresses having completed more than 10 swaps a minute at any point during the last 60 days. For this calculation double-swaps are counted as two transactions.
Swap volumes are net of fees and slippage (to_amount_usd is used).
Double-swaps are only counted once in daily swaps.
Swap fees represent the RUNE liquidity fee plus the asset liquidity fee paid to complete the swaps. ((LIQ_FEE_RUNE_USD + LIQ_FEE_ASSET_USD) is used)
The period of observation is 60 days ending on May 13, 2022.
Thank you for reading.
