Decentralized exchange protocol, Uniswap is well on track to end the year on a high, thanks to the DeFi boom, which boosted trading volumes on the platform to the same levels as more established centralized exchanges, including Coinbase.
The protocol has thrived mainly as a result of its decentralized ethos. However, a single point of centralization, such as the Uniswap V2 front-end managed by Uniswap founder Hayden Adams and his team, has recently come under fire for arbitrage loopholes on the platform.
Alessandro Mario Lagana Toschi of the Ethereum-based research team, DFOhub, recently published an exhaustive report explaining how routing swaps on the Uniswap front-end drain liquidity pools of hundreds of ETH daily.
There are also allegations that the Uniswap team is denying the problem and are instead deleting messages about the issue in their Discord channels. Our correspondent reached out to the Uniswap community on Discord and discovered that not being responsive isn’t a case when it comes to the rather publicized loophole about the Uniswap V2 front-end.
The real questions, however, border on whether the Uniswap team profits from the loophole and thus not in a hurry to engineer a fix or whether it is merely smart developers farming for arbitrage opportunities in a healthy and liquid market.
Is Uniswap’s hard-coded front-end a Blackhole?
According to Allesandro’s research, which has also resurfaced on Reddit, the primary concern is the Uniswap swap route, which implies that whenever a user swaps any two tokens, the conversion gets routed ONLY through WETH, DAI, USDC, USDT, COMP, and MKR.
Restricting the router to only these six tokens reportedly “results in a price disparity between the different pairs, which allows vampiric “arbitrage” bots to swoop in and extract ETH from liquidity pairs.” On the one hand, only pairs tied to these six tokens can have properly synchronized prices.
The research provides a case study for a transaction that swapped $BUIDL for $UniFi with the arbitrage bot claiming as much as 0.16 ETH from the BUIDL and UniFi liquidity pools in that single transaction. The bots “make these trades dozens of times a day,” with one such bot for the WETH route holding a 371.5 ETH ($126,338) balance amassed from traders and liquidity providers.
But the untold story, according to Uniswap “delegate” Hiturunk, is that the team “have seen no math or formal research papers to confirm this concept or governance initiatives yet to solve the problems purported.”
Hiturunk also believes that the “Uniswap team is in no way profiting from those bots,” and that the theoretical beneficiaries are “users of the liquidity pools who benefit from the arbitrage by rebalancing their portfolios or adding fees to pools.”
Meanwhile, we reached out to Uniswap’s Software Engineer, Ian Lapham, via the same channel, but did not receive a response from him or any team member at the time of writing.
Fixing the Blackhole
A Reddit post about the same topic had claimed that “Hayden and the rest of the team are the ones who are running these bots and sapping the liquidity providers and coins themselves for their vampiric gains.” The argument is that the team has been indifferent to the said issue that they otherwise would have engineered a fix.
Meanwhile, a proposed short-term solution for Uniswap could be revert to routing only through ETH, as was done on Uniswap V1, or the team switches to a front-end that correctly routes through the optimal liquidity pairs.
Hiturunk mentioned earlier also proposed a similar solution which involves “opening up the [Uniswap v2] front-end to custom pathing, thus putting more options in the hands of users, and reducing Uniswap’s direct involvement in maintaining a ‘Best’ routing algorithm.” He also admitted to being open to working with any governance proposals in that respect.
Alternatively, Consensys recently announced its token swap feature for Metamask. The app will source liquidity from different DEXs, including Uniswap, Kyber, 0x API, 1inch.exchange. Such a routing method could also save users and projects from the ongoing ETH arbitrage and allow users to get optimal value from their token swaps.
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