Polkadex: optimizing DeFi arbitrage with AMM smart bots
Arbitrage trading is an excellent way to make money thanks to the disparity registered in the prices of cryptocurrencies in various exchanges that generate opportunities to be taken advantage of, creating a large market of millions of dollars.
In this digital evolution that has undergone the trading of assets in the financial field, arbitrage bots are an opportunity to operate and obtain higher income. Thus, a bot is basically a software that operates automatically in the cryptocurrency market.
With a market so volatile and still exempt from regulation, the different exchanges have a different value for each currency, giving the opportunity to arbitrage itself.
And within the ecosystem, the decentralized finance sector is no exception.
With many DeFi platforms copying Automated Market Maker (AMM) models successfully applied to Uniswap, arbitrage opportunities in these environments appear to be a land of opportunity. However, these attractive price differentials end up being karma for arbitrageurs in the protocols because of inherent liquidity problems.
Users have had to rely on centralized clearing houses at the end of the day of their operations for the effective settlement of funds. While the entry of Bitcoin has solved the banking problem, there is still a deadlock in the solution inherent in the exchange. At this point, is where Polkadex comes in.
Polkadex is a decentralized exchange that tries to unite the best characteristics of the “centralized” exchanges of large volumes such as order books, and the model of the AMMs popularized by the DEX as Uniswap, but under the same interface with a powerful engine of negotiation.
The above has resulted in a new traditional exchange that works in a decentralized way, taking advantage of the technology available through Bitcoin, Ethereum, and Polkadot, empowering people, reducing costs, improving security, removing custody of funds.
An FSP model for opportunities
Faced with the industry’s desperate attempt to use AMM pools to save liquidity on the DEX space, Polkadex decided to scale and leverage the technology that was present to introduce its model called Fluid Change Protocol, FSP.
With its FSP model, Polkadex creates a potential arbitrage option thanks to the technology present in Polkadot, which allows it to support an order book using multiple liquidity pools, something unheard of in the industry. In this way, Polkadex becomes the first Hybrid DEX in the space.
With FSP, incoming orders are first compared to the order book. If the engine cannot match any orders, instead of market to the order book, it compares it to the AMM group, providing additional liquidity for the order book and a possible arbitrage option created by the activity in the book of orders.
“Someone had to innovate. We are happy to do the dirty work. It may not be perfect, but we are confident that once implemented, it can solve the problem faced by DEXs by paving the way for almost unlimited liquidity and high trading collateral if backed by an efficient trading engine “, highlights the team regarding the innovativeness of its model.
With returns on DeFi platforms skyrocketing and investors entering the decentralized finance sector, the risk for low trade execution is increasing as liquidity declines due to blockchain constraints that force an early withdrawal of funds liquidity providers in the groups of AMMs of the different protocols.
With the hybrid AMM order book model streaming liquidity from multiple AMMs to fulfill the order book, Polkadex connects its trading engine directly to these key players in the DeFi ecosystem to solve the liquidity problem.
In addition to liquidity, this hybrid model creates more optimized arbitrage opportunities. The low liquidity of these groups in DEXs is contributing to an already increased risk of slippage for traders.
To avoid this, Auto Market Makers (AMMs) function as chain market-making bots. Trades will be executed only if on-chain bots provide a better price, ensuring that there are no price slippage issues for traders.
Polkadex also offers a unique arbitrage opportunity between the AMM and the order book. Arbitrageurs can profit from any price differential by simultaneously buying and selling the same crypto assets in these two markets.
Through these arbitrage openings, investors have the opportunity to seek profit in a typically opaque area of trade execution ready for manipulation, covered by its zero-fee policy, which reduces the incentive for this bad practice.
Like Uniswap, Polkadex uses an automated market maker model of constant products. A constant product AMM exchanges pairs of assets while ensuring that the total amount of the two currency reserves, the product, remains constant. If there is a difference between the quoted price and the market price, the arbitrageurs will enter and close the price gap.
Incentivized High-Frequency Trading Bots (HFT)
One of the great benefits of Polkadex is the enablement of trading bots for investors of all sizes, retail or institutional, using zero transaction fees. This innovation has several advantages.
On the one hand, they eliminate the initial execution of orders by paying high gas fees, a typical problem today in the vast majority of decentralized exchanges, especially those that flow on Ethereum.
Besides, it allows fast execution times and provides an equal opportunity scenario for anyone who performs a transaction in the order book, since free transactions remove the economic incentive to control the order of execution.
Given the characteristic of feeless transactions, the high-frequency trading «HFT» can be easily involved in Polkadex in the order book together with third-party market makers.
Polkadex further reduced price slippage and tighter spreads by having AMM bots on-chain using price oracles. Traders can develop and run their own custom trading robots on the chain, given the specific blockchain characteristics that Polkadex is.
Risk management bots
With machine learning, AMM bots are becoming smarter risk managers. Through the ability to capture smaller and smaller price discrepancies, AMMs reduce business risks, including market and execution risk, and spreads (the difference between the bid and ask price), and therefore reduce the cost of negotiation.
During periods of high volatility, such as a sudden dip, by reducing business risks on Polkadex, market makers are less likely to remove liquidity from a market when volatility is high.
Additionally, with improved algorithmic pricing, typically a black box, which is also made transparent in Polkadex, each AMM sets prices based on a proprietary mathematical formula.
The exchange rate is determined by the liquidity protocol and other parameters. Polkadex recently provided mathematical proof of its algorithm in its demonstration of the Fluid Change Protocol “FSP”.
The entry into the Polkadex market represents a change in the rules of the game for a flourishing industry such as the ecosystem of cryptocurrencies and especially decentralized finance.
With its technology based on Polkadot’s Substrate, the hybrid exchange proposes to position itself as one of the first decentralized exchanges in the market that attracts a simple and powerful interface to the user, while ensuring endless liquidity for the execution of commercial operations demanded by investors of all sizes.