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So you want to Train Arb Traders?
Great choice! In the dark forest that is web3, bots are swarming throughout the EVM like armed hunters, ready to do your dirty work.
All you need to do is train them, which is easy — no programming required! This quickstart guide will give you everything you need to train an arb bot in three easy steps!
Offer Free Money!
Move Markets (optional)
Manually Grab at the Money
Background
Web2 traditional internet is estimated at something like 50% bot activity, despite less clear financial incentives. From an economic perspective, it’s non-obvious why you would be motivated to run a web2 bot. If you scrape an article about the “Top 10 times [insert today’s trendy pop music star] slayed onstage,” there’s no direct financial benefit to running such a bot.
Meanwhile, web3 bots have clear incentives. It’s tough to figure out an exact comparison, in terms of what % of web3 activity is bots, but we know that it’s likely quite high.
With bots swarming web3, they’re easy to train. All you need to do is show them to the free money and they are likely to take it!
Step 1: Offer Free Money!
The first step in training arb trainers: you need something to train them on!
All you need is any smart contract with any set of programmatic rules by which users can deposit or withdraw assets. Around Ethereum, bots are teeming and more than happy to trade assets into your pool as their prices fluctuate.
If you haven’t built out an entirely new DeFi primitive from scratch, not to worry. Consider launching a DEX — if you’re operating a DEX, odds are pretty good that most of your traffic comes from aggregators and MEV.
If you think operating a DEX sounds tough, don’t fear. Nowadays basic DEXes are easy enough to get off the ground, and starter kits are sufficient and plentiful.
The quickest way to get a basic DEX off the ground is to just use a simple constant product formula (x*y=k). This approach is not recommended for power users, as the formula is fairly inefficient in terms of concentrating the available liquidity. But it’s a great way to get started, and you can optimize liquidity concentration once you get off the ground.
Most memecoins don’t really even want to bother with concentrating liquidity anyway. Concentrated liquidity means less slippage, which could stand in the way of number going up quickly. Pumpanomics 101!
Step 2: Move Markets (optional)
Once you’ve established a DEX or any other smart contract that could be arb traded, all you need to do is wait for an arb trading opportunity to appear.
Usually, this just needs a little market volatility, so if you want you can skip this step and just wait it out. Since it’s crypto, you might not need to wait too long — odds are good the broader market already moved 5% in the time it took you to read this far.
But if you’re impatient, or markets are boring, you can try moving the market yourself.
However, this is not recommended for many reasons. For starters, it could land you in jail if you do it the wrong way (talk to your lawyer before doing anything in crypto!)
But more importantly, it’s never clear how exactly markets move in the wild world of crypto.
One pro tip… if you happen to be sitting atop piles of Bitcoin you seized from Silk Road, you can just dump this onto the market all at once and cause all crypto markets to nuke! This will ripple throughout the entire markets.
For example, an old school attempt might be to improve the value of one of the coins in the pool by increasing its fundamentals. That is, maybe one of the tokens drives more revenue to token stakers in an attempt to give it more fundamental utility.
However, the problem is, crypto markets don’t really care at all about “fundamentals.”
All these approaches to moving markets are labor intensive and not guaranteed to succeed. We therefore just advise waiting it out.
If you choose to wait, you can usually get a bit of advance notice for when the market is about to move by watching the “Fiddy Indicator.”
Basically, while you’re waiting, you just keep an eye out for any potential Tether imbalance. This usually tends to work because insiders like to use USDT to frontrun major market movements, and historically somebody always knows something early…
Just beware that the Fiddy Indicator can get thrown off in the rare instances when DAI goes haywire, like is happening now…
For more on why the Fiddy Indicator is breaking down at present, research Maker DAO and Ethena:
Step 3: Manually Grab at the Money
OK… you touched grass for a few minutes and nos everything is happening suddenly all at once. Markets have finally soared or nuked. It’s time to teach the arb traders!
At this point, a healthy imbalance probably exists in your pool or smart contract. There’s free money to be made in taking a cheap coin and selling it elsewhere where it’s more expensive.
If this arb opportunity exists, all you have to do it try and run the sequence of transactions yourself. Here is one case study in teaching bots on Arbitrum:
That’s it! Your bots are now trained!
In this example, the Llama Lend markets are off to the races, and arb traders are on it!
Note, this method is good but not foolproof. Some reported issues:
The method also appears to work better with MEV arb bots than Aggregators…
Retail always gets the short end of the stick, innit…
If you enjoyed this lesson, consider supporting the case study’s request in getting more funds onto his Llama Lend project on Arbitrum.
More Llama Lend, more arb traders, more activity… everybody wins!
Bear in mind, this has all been instructional, not financial advice. Disclaimers!