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Decentralized exchanges are widely adopted by a large number of traders, and now these platforms play a crucial role in the DeFi ecosystem, processing several million trades per day. However, this rising growth gave rise to increased competition as well. Each trader wants a special tool for them to quickly beat the crowd. Just manually clicking on DEX platforms like PancakeSwap or SushiSwap doesn’t make sense anymore. And to address this, DEX trading bots have been invented.
These bots are more than just a simple automation tool, as they scan the blockchain data with utmost precision, predict market moves, and execute trades in a matter of a few seconds, which we humans fail to do. Recent reports state that a good portion of DEX volume is done by bots.
In this blog, we will break down everything about DEX trading bots, like,
A DEX trading bot is an automated software that is especially designed to reap profits in decentralized exchanges. Unlike centralized bots that are connected with the exchange’s API, these bots function on the blockchain. They look for opportunities, scan the liquidity pools, and place trades with the help of smart contracts!
DEX trading bots have a lot of varieties. Each type is built for specific purposes. And learning the difference is the key, as it helps traders choose the right tool. Let us view some of the common types.
These bots scan multiple decentralized exchanges at a time to find the price difference for the same token. Say, for instance, if ETH is $2,500 on Sushiswap and it is $2,550 on Pancakeswap, then the bot buys it at the lower price and sells it for a higher price. Thus, making a profit from the price difference.
Sniper bots are known for their lightning-fast speed, especially during token launch. The moment a new token is launched, it would snipe it before other users come in.
Liquidity is often referred to as the heart of an exchange! Yes, it is true. Market-making bots bring in the required liquidity by continuously placing buy and sell orders to ensure a smooth trading experience for their users.
MEV bots take advantage of how transactions are executed on the blockchain. They use multiple strategies like front run, back run, or do both at the same time, which is known as “Sandwich attack”. This helps them capture extra profits! Some find it to be extremely dangerous for other traders, but they are one of the highly profitable strategies.
For those who need long-term investments, DCA and grid are ideal! They buy and sell tokens at a particular interval or set price range. This reduces trading in bad timing and also helps smooth out the volatility!
An ideal DEX trading bot is more than just speed! And they require several powerful features to act accordingly. Here is a list of key features of a DEX trading bot that make it smart!
The bot scans the pending transactions regularly in the mempool to catch them before they are confirmed. This is crucial for sniping!
Once a profitable opportunity is found, the bot will execute the trade almost instantly, without even wasting a second. As every second counts in crypto trading, even a millisecond delay can lead to the loss of opportunities.
High gas fees are the common strategy used by bots to grab the opportunities before others, but the truth is, high gas fees can eventually kill profits. So, the bots make use of strategies like,
This not only saves the cost but also helps you stay competitive!
DeFi is spread across various blockchain networks, like,
A bot with cross-chain compatibility is ideal as it offers the needed support and flexibility, thus helping you to have a wider reach.
Security is non-negotiable, due to the involvement of money! Even a small vulnerability can make the wallet wash out. So, the bot must come with security protocols like,
These protect users from hacks and data theft.
Take profit, stop loss, and other similar risk management tools are essential to keep emotions under check. And it also prevents huge losses during extreme volatility!
DEX trading bots follow a logical flow from scanning opportunities to executing those trades and gaining profits from them. Here is the process!
The bot first scans the blockchain for signals or new activities, like,
The bot constantly scans the blockchain and mempool for signals: liquidity additions, large trades, or sudden price shifts.
With the help of algorithms, it identifies events like
Before proceeding, the bot checks for rules, like
By understanding all these, it effectively prevents unwanted execution.
If the chosen trade ticks all the checklist filers, then the bot immediately submits a transaction through a connected wallet. And speed is the most important aspect here, as most of the strategies depend on being ahead of others in a matter of seconds.
The bot then proceeds with execution and updates positions. Some bots are capable of automatic exits when targets hit stop-loss.
Developing a DEX trading bot is more than just coding! It involves several key steps. Here is a breakdown of those steps!
The first step is to decide what kind of bot you want. So, ask yourself a few questions like,
Some bots run on-chain with the help of smart contracts, but might need higher gas fees. Meanwhile, others would run off-chain, and only final trades hit the blockchain! So, choose what kind of architecture you would like to have for your bot.
Different programming languages are used for various purposes, like,
Choose the one that suits your goal for how the bot should be.
The bots must be integrated with various connections to expand their view of the market, like,
Before going live, the bot must undergo rigorous testing to identify issues at an early stage. By doing so, you can fix the bugs and make sure it doesn’t have any other issues and performs well while hitting the end users.
Upon completion of testing, the bot is all set to be launched with proper security protocols. And even after deployment, it is advised to monitor the bot with utmost care to analyze its performance and make improvements.
Eventhough DEX trading bots offer the required speed and automation, building and running them involves a few complexities.
When a larger number of transactions and users come in, several blockchains like Ethereum and others would get clogged. And transactions may fail at times, or else it would demand higher gas fees to execute trades. A bot must adapt well to these changing conditions!
You have to remember that you are not the only one to deploy bots, as several traders like you use bots to make profits. So, bots must be developed with strong and faster infrastructure and well-optimized code to stay in competition.
Bots can, at times, become victims of MEV strategies. Say, for example, a frontrunning bot could reorder, cancel, or even skip your trade in the block, thus making your transaction non-profitable.
Integrating with poorly audited DEX contracts can lead to hacks and threats. Even a small vulnerability can drain funds instantly. Security audits are a must to ensure transactions are secured.
As the DeFi ecosystem matures, bots are expected to become smarter in the coming days. Let us see what the future has for DEX trading bots.
Artificial intelligence and machine learning can give bots the capability to predict market opportunities. So, instead of reacting to market events, these bots would effectively analyze the patterns across various blockchains that help them make informed decisions.
Several entities started to explore DeFi-like,
With their entry, bots would become more professional with an advanced level of risk controls.
Bots are more than just tools for traders! They will be a part of DeFi. And market-making bots will ensure stability of liquidity, and arbitrage bots will help keep prices fair across various exchanges.
DEX trading bots have evolved more than just being experimental! They are becoming a survival kit for traders in an area where precision and speed matter the most. For traders, running a DEX trading bot is more like unlocking opportunities that would help them catch possibilities that cannot be achieved manually.
If you are interested in developing a DEX trading bot, then partnering with Fourchain, a leading crypto trading bot development company, is the right move. Our team will always be there behind you through out this journey, and help you launch a bot that reaps you unimaginable profits. Take the first step by connecting with us today!
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