DeFi pools are no stranger to the kind of trouble that mathbots can cause, and for those supplying liquidity, the pressure is on. A case in point is a trader who was left out 10 Ethereum after a lapse in judgment with some bot parameters.
How Mathbot Exploits Target Liquidity Providers
The Unchained podcast has put a spotlight on this trend of more refined exploits making their way into the market. In one instance, a provider failed to set a cap on price impact when adding new liquidity. That opened the door for a mathbot to run a sandwich attack: it placed trades on either side of the provider’s transaction to make a quick profit. The end result was a 10 ETH loss to the bottom line.
It is all about timing and settings that go unnoticed; the bots will find a way to make a profit wherever they can. For anyone in DeFi, it is a reminder not to be too casual with the automated forces at work in these pools.
Instant Liquidity Injections: Another Growing Concern
Unchained is also drawing attention to a different kind of problem for liquidity providers: the instant liquidity added by mathbots. In a matter of moments, these bots will pour a sizeable sum of capital into a pool right before a big trade and pull it out just as quickly. It’s a way for them to corner the most lucrative transactions, leaving regular providers with nothing to show for the volume.
The upshot is that the reward structure for those putting in the work is eroded; it becomes a lot more difficult to see any real return. You can see from how common this has become just how advanced these automated systems are and why DeFi traders have to be on their guard.
How Liquidity Providers Can Protect Themselves
What comes through in the Unchained episode is a case for being on top of your bot and pool management. It’s wise for any trader to keep a close eye on their settings, especially when it comes to things like price impact or slippage tolerance, so as not to be taken advantage of by a mathbot. On top of that, a watchful eye on what is happening in the pools will let liquidity providers spot and act on any odd behavior.
These are the kinds of steps that keep losses at bay and make for smoother sailing in DeFi. With the way automated strategies are changing, you can’t afford to be anything but proactive about risk.
Source — Unchained: https://www.youtube.com/watch?v=cMyspa15QQ0
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