Core Question

Are arbitrage good or bad? What purpose do they serve, and are they right?

What are Arbitrage Bots?

Arbitrage bots are essentially bots that leverage the high fluctuations of the crypto market to buy on a micro low movement and sell on a micro high movement.

Think of it this way. I have a token XXX worth $100. The price is currently $99.75 because it just dropped from slightly more people selling. Arbitrage bots would immediately see that and buy, selling when they make a profit for the entity operating it.

They also monitor the price of a token across DEX, CEX, and exchanges, and the moment the price difference is large enough, they buy on the cheaper and sell on the more expensive to make money on the spread.

Argument for good

There are a few different arguments for whether they are good. The biggest and most well-known is stability. 

When arbitrage bots detect those discrepancies or price movements, they instantly buy and sell at the same time (yes, they open parallel orders), while being connected directly to the servers. This allows them to get the entire process of detection to completion in under 50ms. That is over 2x faster than we can blink (we can blink 100ms at top speed).

This allows us that when we go to do a trade, we don't suffer from choosing a worse platform, the price is all more or less the same. That way, we can ensure a fair market price. This is also what helps stablecoins like USDC and USDT to stay at $1. Because they are 24/7 redeemable or mintable with Tether and Circle with a large enough amount, a bot could request $100,000 worth of the stablecoin from these companies and instantly sell if the price was say $1.001. That way, the bot just made $100 quick and easy, all the while bringing the price back down to $1, ensuring we pay/sell fair. If the price on the exchange was low enough below that $1, they would buy a huge quantity, bringing the price back up to $1 and then redeem or resell, making profits.

Argument for bad

The argument for bad is, in my opinion, a mix of jealousy and moral conflicts. When people hear of a corporation just manipulating the system in order to make easy money like this, we feel like we are left out. That makes use envy the thing, which in this case, is the money to be made from doing literally nothing except run hardware. And, since we can't do this at home, we feel gatekept. This causes us to think that if we can't do this, then neither should the people who are doing this.

So, it just feels wrong, even though it is all legal and in fact required. Because without it, trading would be a big mess of second by second monitoring, worry about getting the best price, and having 50 different trading platforms open in our browser, constantly monitoring the sites. And, so even though it does feel wrong, we need them, whether we like it or not.

Conclusion

While I do not really like arbitrage bots for the reasons above, I still think they play a enormous role in the crypto world, where it would really be hard to do without them. Without bots, stablecoins would be purely at the mercy of supply and demand, destroying its pegged nature. So, whether we like them or not, they play a critical part that simply can not be replaced.

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