How Uniswap could devalue DeFi tokens

Research suggests that Uniswap’s token routing is centralized.

The exchanges would thus pass through six pairs of „arbitrated“ tokens.

Vampire bots make their profits through arbitrage between price differentials

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A recent report looked into the hypothesis that Uniswap could inadvertently devalue tokens by forcing transactions to go through privileged pools of liquidity.

DFOhub’s investigation suggests that Uniswap is centralized by design and allows “ vampire arbitrage bots “ to exhaust the prices of certain tokens. Automated trading robots that perform token arbitrage could be the root of the problem, he added.

Uniswap’s routing – unintentionally – not only prevents the growth of certain projects, but actually robs them of their value.

„Vampire bots“

The report goes on to explain that Uniswap’s token routing is not centralized, as it prioritizes pairs tied to only six tokens, instead of going through the full spectrum of liquidity pools. The tokens, which he calls Uniswap’s six arbitrators, are WETH, DAI, USDC, USDT, COMP, and MKR.

In the analysis, it is added that the operation of the Uniswap system has been hard-coded to ensure that the prices of these tokens are in sync with each other, but not with every other pair.

In summary, the router will bypass the high liquidity pairs that exclude these six privileged tokens, even though crossing them would be the most profitable route.

Research has shown that normal trading occurs only between pairs linked to these six tokens, and prices only change within those pairs and not others, resulting in price disparities between them.

Arbitration bots come into play, making the most of the difference, stripping them of their value to fly away with free ETH.

The report uses an example of how arbitrage robots can dump ETH from pools outside of these six pairs, adding that this is an irrevocable loss of value.

Uniswap Up

What to do ?

DFOhub co-inventor and report author Alessandro Mario Lagana Toschi said the Uniswap team needs to take this issue seriously.

One suggestion, which might not be popular, would be to revert to Uniswap v1 where routing is done only through ETH. Another option would be to counter arbitrage through another bot in a system that DFOhub is working on called QuickScope.

The first version turned out to be unsuccessful, as vampire bots make money on micro-transactions, for example spending $ 5 in ETH to earn $ 8, and using a Solidity feature called “Delegate Call” which reduces gas costs. A QuickScope v2 robot is currently under development and tested by the team.

DFOhub hopes to work closely with Uniswap to resolve this issue that depletes ETH and devalues ​​tokens on the world’s most popular DEX.