5 ways crypto bots are ruining crypto – including pulling the auto memecoin rug

Whether it's executing memecoins algorithmic transactions or aggregating transactions in anticipation of weather, bots are everywhere in crypto today.

These automated programs operate with speed and accuracy beyond human capabilities, performing their programmed tasks 24/7 without a break.

However, the benefits these crypto bots bring to their owners come at the expense of real traders and blockchain users. Their inhuman speed and accuracy lead to an uneven playing field, creating huge differences in the market.

The magazine has even seen crypto bots creating and launching new memecoins on Solana, pulling from old coins directly to mat users.

How crypto bots dominate memecoin markets and airdrops

Rampant bot activity causes significant congestion on blockchain networks, resulting in high transaction fees and reduced processing times.

Solana, who acquired Ethereum's payment revenue this week, experienced first-hand how bot activity can undermine real user experience during this year's memecoin craze.

The blockchain has experienced severe congestion issues, with up to 75% of transactions failing.

“These thousands of meme tokens were launched on Solana. Everything is automated, and it has 100% human impact,” Ganesh Swamy, CEO of information infrastructure firm Covalent, told the magazine.

Forget the economic significance here – [the network] It just becomes unusable.”

The situation worsened and Solana developers had to release an update in April to address congestion.

Although recent trends have brought Solana into the spotlight, problems caused by bots are not limited to the Internet. It is a broad issue that affects any profitable crypto trend.

The rise of MEV: Crypto bots make billions out of Ethereum transactions.

A popular use of bots is the maximum extractable value or MEV – also known as the “invisible tax”.

On blockchains like Ethereum, transactions don't happen in chronological order – instead, validators prioritize transaction fees by orders of magnitude. Therefore, when a good profit opportunity is revealed in the trading queue, validators can enter their own trades to enter the trade first, or add trades before and after large orders to profit from anticipated price changes. This additional gain is an example of MEV.

Checking all the transactions in Mempool (the waiting queue for transactions before they are added to the blockchain) can be a tall order. This is where crypto bots come in to automate the scanning of MEV opportunities.

This is not to say that bots are the bad fruits of the industry that exist only to profit their operators while stealing value from real users.

In today's digitized economy, trading can be competitive, and profitability can be determined by the execution of a second.

An essential part of the crypto industry that accurately sells orders and maintains accurate prices, market makers rely on bots to implement algorithms to ensure prices are maintained and liquidity is provided across various markets.

“We're talking about microsecond optimization, which is obviously not possible for humans,” Matthias Beke, founder of marketing firm Chiron Labs, told the newspaper.

“So, without automation, our business wouldn't be scalable at all.”

Without Becke Botts, he estimates his business would need to hire about 200 more people to function properly as a marketer.

“In a high-frequency business, the bot will be a very important part, we need 20 to 30 people to run it,” he said.

“Bots and marketing algorithms are used on our end 99% of the time.”

Solana Memcoin Madness: Crypto bot-driven startups and carpet-dragging explained.

The Solana memecoin craze is ongoing, although it has cooled off from its early-mid-2024 peak.

In the week to July 19, approximately 2,600 new Solana memecoins were launched in liquidation, down from the 19,000 new tokens launched in a single week in February.

Rampant bot activity continues to fuel the memecoin scene on the network, with some automated features allowing users to launch tokens on platforms like Pump.fun and increase transaction volumes by organically creating and promoting transactions across multiple wallets.

Magazine found a sample wallet on Solana's blockchain with over 3,500 different tokens, mostly memecoins.

Bots can automate memecoin launches by scanning trends, but they often skip important steps, such as properly deploying or auditing smart contracts, said Big_Kat, head of product for the Solana-based memecoin project.

“When memecoins are used to unlock without proper checks such as audits, it leads to unethical practices and risks that tarnish the reputation of the industry,” he told the magazine.

Sample wallet DeFi transactions show that blockchain records are generating new tokens at an alarming rate. At the same time, it eliminates the liquidity of other tokens you create.

This sample wallet's frequent liquidation and rapid token operations are not identical to legitimate token projects.

But again, there are legitimate bots that play a vital role in managing liquidity and showing that a project is taking its product seriously.

“As for Laika, we have successfully launched the first pre-sale using a Telegram bot integrated with BNB Chain, so users who are not familiar with Web3 wallets can easily join the project at the very beginning.”

Sandwich Attacks and Front Running: How MEV Bots Exploit Traders

In the two years leading up to the September 2022 Ethereum merger, the network recorded $675.6 million in acquired MEV, according to data from Flashbots, MEV's research group.

Since then, this price has increased dramatically.

Post-merger, 526,207 ETH – about 1.78 billion dollars – was released in MEV.

Some argue that MEV is now a natural part of blockchain operations, as it uses the transparency and accessibility of Mempool data to identify and execute profitable transactions. Others argue that MEV is widespread illegal theft by network operators.

MEV can be harmful by creating challenges to fair market operations and inflation of transaction fees.

Some MEV applications, such as sandwich attacks, affect users who make large transactions.

Sandwich attacks occur when the MEV bot finds a transaction in Mempool, such as a large buy order that can affect asset prices.

When that transaction is chosen to run on the blockchain, the attacker places his own order to take advantage of the expected price increase before the victim's transaction.

Then, after the desired transaction, another transaction is made, but this time, the attacker sells the property at a higher price.

The attacker profits from the price difference by running large trades on the front and back.

The victim of a sandwich attack may lose money due to high transaction fees or slippage.

Some networks have taken measures to prevent sandwich attacks.

In June, the Solana Foundation expelled a delegation verifying its involvement in the sandwich attacks.

In the year In early 2022, the MultiverseX blockchain introduced deterministic and random sorting of transactions, which was followed by a drop in bot activity and sandwich attacks.

“By the end of 2021, we're going to see a lot of bot activity and a lot of sandwiches,” Multiverse X core developer Robert Sassu told the magazine.

MultiverseX limits bot activities by charging 0.5 ELGD (about $18) to launch tokens on the network. Although Sasu considers it a side effect of the network architecture, this fee is not explicitly designed to address bot activity.

Crypto bots and Sybil Farm are ruining airdrops for users and projects.

In recent years, airdrops have become the most reliable token launch method for projects seeking to avoid prosecution from the Securities and Exchange Commission or other regulatory agencies.

The concept back rewards users with newly generated tokens for performing certain tasks prior to launch. This encourages users to send an army of bots to perform those tasks at different addresses controlled by the bot operator.

Some of the biggest airdrops this year have faced severe backlash, as they are believed to have (perhaps inadvertently) prioritized Sybil and bot behavior over human participants.

Recent airdrops have put barriers in place to limit airdrop farming bots and Sybil operators.

But they were not perfect.

“Industry [airdrop] Agriculture has only developed in the last 12 months, and that is only because of the economic benefits of many bot farming activities,” says Swamy.

“When you don't have opportunities for this skewed market participation and something that opens up investors to participate in something for the hope of profit, you're inundated with bots and industrial farmers.”

In June, LayerZero announced its token allocation plans for its interblockchain messaging and interoperability project, which will include airdrops from 6 million total 1.28 million wallets.

The rest, 78% of addresses, were ineligible because they didn't meet the criteria or were identified as Sybil, according to a recent Delphi Digital report. Some users have complained of getting caught in the flames.

Still, many Sybil bags passed the screening and collected their share of the prize.

A week after announcing the screenshot of the airdrop, activity on major DApps dropped significantly, at least 70% per week, according to the report.

Meanwhile, ZKsync, which recently went live, has been heavily criticized by industry watchers for lacking anti-sybil measures, leading to unfair distribution.

Beware of trying to buy your own bot

Retailers trying to get in on the bot action can sometimes be fooled. The Commodity Futures and Trading Commission has warned that automated trading bots armed with buzzwords such as “artificial intelligence” are sometimes scams that trick investors with false claims and inflated expectations.

Becke echoes the warning, especially for services that promise unrealistic returns, such as “turning your $1,000 into $2,000 in a week.”

“That's not how marketing works,” he says.

“Maybe there are a few solutions that do this right – and hats off to them – but 99% of these shops are worthless and a huge risk.

The future of crypto: aligning bots with fair market practices

Meanwhile, some of this year's most lucrative trends may be taking over the industry, says MultiverseX's Sasu.

“Now the air drops are decreasing. I think it was even crazier at the beginning of the year. But since then, most of the airdrops have been picked up by bots,” he says.

“Projects, especially the big ones, are paying big bucks to onchain analysts to suggest Sybils to kill people from bot farm airdrops.”

Airdrops are harmful to ecosystems, Delphi Digital said in a report. After the snapshot date or the start of the simulation, the activity of the airdrops analyzed by Delphi Digital has decreased significantly, suggesting that the campaign is full of bots and inorganic farmers.

In contrast, experts tell the magazine that MEV will continue to gain popularity, although Swamy noted that their continued rise could erode confidence in the crypto market.

Subscribe

A very engaging read in Blockchain. It is given once a week.

John Yun

Yohan Yun is a multimedia journalist who has been reporting on blockchain since 2017. He has contributed as an editor to crypto media outlet Forkast and covered Asian technology stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.