Rampant bot activity on DeFi platforms has pumped up the on-chain transaction volume of Solana-based stablecoins past $1 trillion in the first two months of this year alone.
As of Feb. 22, Solana’s monthly stablecoin turnover has reached $643 billion, surpassing January’s volume of $531.32 billion, according to data from crypto analytics platform Artemis.
Most of Solana’s transactions occur on its decentralized exchanges (DEXs), most notably on Phoenix, which has caught the attention of media outlets, data providers, and social media influencers.
It has suspiciously high volumes of daily USDC transfers, hitting $27.5 billion on Feb. 20 alone, according to data provider Hellomoon.
To put that figure in perspective, that one DEX on Solana saw more USDC volume on Feb. 20 than Ethereum’s entire stablecoin transfers that day of $20.9 billion.
It’s worth noting that Solana has $2.2 billion worth of stablecoins in its ecosystem, compared with Ethereum’s $71.6 billion, according to DefiLlama.
Phoenix has not yet responded to Cointelegraph’s request for comment.
Cointelegraph’s analysis of the transactions at Phoenix reveals that the majority of its trades are likely conducted by bots rather than people. Trading bots automate complex strategies like arbitrage, which is the practice of purchasing assets in one platform and selling them in another to profit from the price differences in markets.
Blockchain records from the Solana blockchain explorer, Solscan, reveal that the majority of Phoenix’s countless daily orders are spammed by just a handful of addresses.
“A relentless stream of transactions, far beyond human pace, often tripping over themselves in haste,” Slava Demchuk, co-founder of blockchain intelligence platform AMLBot, tells Cointelegraph.
“The notion that bots might be orchestrating these transactions isn’t far-fetched.”
What are the bots doing on Solana’s Phoenix DEX?
Phoenix uses an on-chain order book, which means every transaction that is sent to the exchange gets stamped onto the blockchain.
Cointelegraph analyzed the activity of one of the addresses suspected of running an arbitrage bot, FreyaXYaCwVy86BdNECd7BXnqEvFUbt3p6d2B5eS5zDv (which we will call Freya for simplicity sake), to better understand Solana’s transaction volumes.
Freya creates about 150 orders per minute at Phoenix, with most of these transactions failing for various reasons, such as slippage and insufficient balance. Examining one of Freya’s unsuccessful transactions shows that the address runs a program called “my-arb-program” when interacting with Phoenix and other Solana-based DEXs.
The program log shows a sequence of calls and responses that align with how trading bots interact with blockchain networks. They often rely on programmatic interfaces to execute sequences of operations based on certain triggers.
The sequence of Freya’s instructions includes multiple swaps and transfers across different DEXs (Orca, Phoenix, and Raydium), reflecting the trading activities of an arbitrage bot attempting to profit from price discrepancies across the platforms.
While Phoenix’s volumes are inflated by bots, that is not necessarily their purpose.
“My guess would be that they are ‘normal’ users of the system that are running bots on it,” said Sam Williams, founder of distributed storage network Arweave. “Most of the [traditional finance] trades are also made by bots — so this is a positive, not negative sign,” Williams added.
Market makers and arbitrage bots
Bot activities can signal a sophisticated market. However, when bots are unleashed on platforms with on-chain order books like Phoenix, their failed transactions can also inflate trading volumes, painting a misleading picture of the network’s trading activities.
Compounding the issue, arbitrage bots may not be the only non-human traders on Phoenix and other Solana-based DEXs. Eugene Chen, co-founder of Phoenix core contributor Ellipsis Labs, told DL News that market makers are also behind the titanic volumes.
X19, a pseudonymous developer at infrastructure company Syndica, tells Cointelegraph that “it’s a lot easier to run profitable market-making bots” on a central limit order book DEX but speculates they might have additional motivations too.
“Since Phoenix might have a token later they might just be wash trading to up their volume in hopes for an airdrop,” x19 says.
Market makers play an important role in financial markets as liquidity providers. Like arbitrage trading, this function is usually delegated to automation in both traditional and crypto markets.
Cointelegraph has unpacked the trading activity of LUKAzPV8dDbVykTVT14pCGKzFfNcgZgRbAXB8AGdKx3 (which we shall call LUKA), an account that appears to be running a market-making bot. LUKA creates about 150 orders per minute on Phoenix.
The program log for LUKA’s transactions shows nine different sequential instructions, including trading actions: canceling orders, placing limit orders, and placing multiple post-only orders.
The automated sequence of actions and structured order placements indicate pre-defined strategies being executed by bots that resemble a market maker rather than an arbitrage bot. For instance, the placing of limit and post-only orders point towards intentions to provide liquidity.
Arbitrage bots, on the other hand, seek to profit from price differences between markets without necessarily providing liquidity.
Are the bots healthy, manipulative or meaningless?
In traditional finance, arbitrage trading is legal in most jurisdictions, including the United States. Such strategies can contribute to improving the health and efficiency of markets by effectively adjusting mispriced assets.
“Behind the scenes, bots are driven by the allure of profit, exploiting every sliver of opportunity for arbitrage or market manipulation. While their dance can help align market prices, there’s a thin line between healthy arbitrage and disruptive market gaming,” says Demchuk of AMLBot.
“It’s a nuanced debate, touching on the essence of fair play in the digital age.”
Some market participants believe Solana’s transaction volume is false and manipulative, but others argue that the transfers from market makers are legitimate, albeit “meaningless.”
I believe the widely circulated Solana Stablecoin Volumes, particularly $USDC, are completely FALSE if not MANIPULATED through Spoofing.
And I got the receipts to show for it, please read on:
— Wazz (@WazzCrypto) January 29, 2024
Solana is the comeback kid
The emergence of widespread bot activity comes during a time of resurgence for Solana. In December 2022, following FTX’s bankruptcy, SOL traded under $10 for the first time since cracking double digits in February 2021.
“Solana is maybe one of the most shocking price actions (among the large-cap coins) that we’ve seen in the past 24 months, says Justin d’Anethan, Asia-Pacific head of business development at crypto market maker Keyrock. “For a moment, it almost felt like it wouldn’t survive the bear market and the association or support from FTX/Alameda.”
At the time of writing, SOL was changing hands for $103 per token, up by more than 10x from the lows it plunged to when FTX collapsed. Solana’s native coin SOL is still the world’s fifth-largest cryptocurrency by market capitalization, with approximately $50 billion.
Solana has faced criticisms directed at the network’s inability to stay online, including a May 2022 outage caused by bots invading the network. Earlier this month, Solana suffered its 11th outage in the past two years.
“Unlike the many outages that plagued the blockchain in 2021-2022, the more recent pause was due to a bug in the updated version of the Solana validating software, which was then quickly fixed. Other than that, even in periods of high throughput, the blockchain has been running unencumbered for many months, says d’Anethan.
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