DeFi is evolving and so are the trading strategies to attract lucrative returns. Off-late, sandwich trading bots have garnered widespread popularity for their ability to mint profits from price fluctuations.
To put it simply, a crypto sandwich bot is an automated trading tool that monitors large buy/sell orders and places their own order (sandwich) between them. They use a technique called ‘sandwich trading’ that utilizes the price movements of an asset.
The bots take total advantage of the blockchain’s transparency by analyzing the pending orders in the queue in a mempool.
In an industry pacing at a CAGR of 9%, while valuing total revenue at USD 37K MN, traders are likely to utilize such tools.
Core Components of Crypto Sandwich Bots:
1. Mempool Monitoring: Continuously scanning the mempool for large pending transactions that could move the market price significantly.
2. Order Execution: Rapidly executing the front-running and opposing trades to capture the price movement.
3. Trading Strategy: Implementing algorithms to identify profitable opportunities and manage trade entries/exits.
Sandwich trading bots continuously monitor the pool of pending transactions, waiting for confirmation and inclusion in the subsequent block. Once the bot detects a large pending transaction in the mempool, it executes two trades, as explained below:
The bot literally ‘sandwiches’ the transaction between two trades; it pays a lower price to get in and exits at a higher price. Thus, it earns significant profits from the price difference.
Since the blockchain ledger is transparent, Sandwich trading crypto bots are able to foresee pending transactions before they are included in the block.
The trading strategy enables algorithms to identify profitable opportunities based on factors like order size, slippage tolerance, and market conditions, while managing trade entries, exits, and risk management.
Consider a large pending transaction on a DEX to buy 100 units of crypto, say ‘X’ 100 ETH worth $20,000 at the current market price of $200 per X.
Here’s a quick run-through of the benefits for everyone:
While we are at it, it is worth mentioning another school of thought that argues against the use of such trading strategies. In DeFi, however, it is still not illegal to use sandwich trading for the above-mentioned pros. Not to miss, the regulatory landscape surrounding sandwich trading crypto bots is still evolving.
At first, it may sound like building just another trading platform, but crypto sandwich bot development requires deep-rooted expertise in blockchain, AI, and, of course, trading!
The following components should form the core of your product:
Not to miss, choosing the right blockchain will be a key challenge if you don’t have tech expertise in this domain. Different blockchains and DEXs may have varying mempool structures and transaction fees, impacting the crypto sandwich bot‘s effectiveness. At Antier, we handhold our partners in researching all Layer-1, and Layer-2 blockchains and choosing the most appropriate platform.
As the DeFi ecosystem continues to mature, a DEX protocol and a sandwich trading bot, in general, are likely to evolve in response to each other:
As DeFi matures, crypto sandwich bots emerge as key players, reshaping the landscape with their nimble strategies. Their ability to swiftly capitalize on market inefficiencies underscores their significance in the DeFi narrative.
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