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Can Decentralized Trading Bots Become a Thing?


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The fact that Ethereum is too slow and too expensive for order books is what has led to the automatic market making (AMM) liquidity pool (LP) becoming the basic building block of all of DeFi. Even as DeFi has evolved (LP staking, Curve Wars, protocol owned liquidity, etc.), liquidity pools remain at its heart.

One of the big positives of LPs is that they've allowed people who aren't traders to participate in market making and start earning passive income instead of just hodling and hoping. At the same time, I think any good trader would agree that if you've got the right combination of brains and guts to be a good trader, you want order books. You want to be able to control the prices and sizes at which you enter and exit positions. Liquidity pools are inefficient (they require a lot of liquidity compared to the profits that they make) and they expose their participants to a lot of risk. This is why Wall Street uses order books.

I know there are some small examples of on chain order books, but none have really been able to gain large-scale adoption. If the XRPL can get some form of smart capabilities, whether it's through hooks or federated side chains or Flare's state connector, it could step up and find a place for itself in DeFi. The XRPL was from the beginning designed to be a hub where you can trade any currency represented on the ledger for any other one. Its order book DEX has been sitting there, largely idle, for years just waiting for people to want to use it.

Could the XRPL develop an ecosystem of trading bots and draw some of the billions of dollars of people currently looking for passive income from liquidity pools? I'm not a trading expert but I see two big problems. First, many trading techniques have a limit to how much volume they can work at just because slippage increases with volume. The problem is figuring out to what degree a purely automated trading strategy can replace a human expert trader. All professional Wall Street traders, for example, use automation, but while computers can process data much faster than our brains they simply can't understand things and get a sense of the forest from all the trees that all those data points represent. Successful trading relies on developing a thesis and following through on it.

I don't think these are insurmountable problems. First, liquidity has a way of creating its own demand - the more liquidity that's in a market, the more people want to trade in it. And second, trading bots don't have to beat expert traders, they just have to provide more profit for non-traders than they could derive by other means.

Could the XRPL position itself as an order book DEX for smart contract trading bots running on distributed ledgers? Is that a legitimate niche that the XRPL could carve out for itself? Or is that just a pipe dream of mine?

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  • 7 months later...

If we have decentralised finance then why not have decentralised bots ) sounds really impressive, my opinion. I would add that a stock trading bot is a computer program designed to automatically buy and sell stocks online without human intervention. The bots use algorithms to analyze market data and make decisions based on predefined criteria. They can be used to trade a variety of asset classes and can be tailored to meet different trading strategies. The bots execute trades at lightning speed and are often used to capitalize on short-term opportunities such as arbitrage. More info here https://3commas.io/blog/best-stock-trading-bot

Edited by JoelFlores
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