Fully On-Chain Arbitrage with Reactive Network

Summary

• Arbitrage often takes place through the usage of an army of automated bots which monitor arbitrage opportunities of certain token pairs. These bots often operate off-chain.
• Because the Reactive Network listens for the emission of smart contract events, DEX transactions which take place on-chain which lead to arbitrage opportunities can be captured by the network.
• Programmed correctly, Reactive Smart Contracts can respond accordingly to take advantage of pricing differences. All of these can be done on-chain. Since there’s no need for off-chain components to initiate transactions, latencies between off-chain and on-chain components are completely eliminated.

Overview of Crypto Arbitrage

Today, crypto arbitrage is typically conducted by an army of bots. Set up to monitor token pairs across various exchanges, these bots continuously scan exchanges and search for price discrepancies between these token pairs across the platforms which trade them.

Once a discrepancy is identified, the bot will perform calculations to determine whether or not taking advantage of the opportunity will result in a profit. Bots often operate off-chain, and interact when necessary with the blockchain to execute trades.

The Problem

Because many of these bots are operating off-chain, the bots may often encounter communication delays and other latencies between on-chain and off-chain components. These latencies can be the difference between exploiting an arbitrage opportunity, or leading to some other bot (or individual) to exploit it before they get a chance to.

Further, the running of the bots is typically also a centralized experience. That is, bots are not decentralized and distributed — and so if there is an outage with the bots at a particular time, those bots may be out of commission and unable to “work” while the outage is being fixed.

The Solution

PARSIQ’s Reactive Network introduces new features into the underlying capabilities of EVM chains. In particular, the network will allow one smart contract to subscribe (and react to) the events of another smart contract. These contracts are called Reactive Smart Contracts (RSC).

Leveraging the Reactive Network in an arbitrage scenario, the army of off-chain bots can be eliminated. In the way that bots scan exchanges for pricing discrepancies of token pairs, RSCs can be programmed to listen for the same discrepancies of certain token pairs across the same exchanges.

Programmed into the RSC, logic can be configured such that when these discrepancies arise — the RSC can perform its own calculations to determine profitability of executing upon the trade. All of this takes place on-chain, reducing the latencies that would be introduced by having off-chain and on-chain solutions work with each other.

Further, RSCs can also be structured to account for transactions which might require higher gas fees — thus prioritizing their transaction to ensure that it goes through timely.

Conclusion

With increasing interest in the cryptocurrency space, as well as the numerous platforms/environments where token pairs can be traded — there will likely be a corresponding rise in arbitrage opportunities for those who wish to leverage them.

Until now, armies of bots have been the dominant method in identifying and executing trades to exploit such opportunities. While effective, there is centralization risk as well as latencies and other off-chain factors which are introduced into the process — thus affecting the overall efficiencies and profitability of such strategies.

With the Reactive Network, the capability to exploit arbitrage opportunities can now be fully done on-chain, leveraging decentralization, increasing speed, and ultimately increasing opportunities to exploit all opportunities which arise.