Grove’s Shrinking Liquidity Pools
How Arbitrage Bots are Extracting Grove’s Liquidity One Arb at a Time
TL;DR:
- Decentralized exchange arbitrage hurts investors
- Each arbitrage trade extracts BNB from Grove’s liquidity pool and drives the token price down
- Grove’s artificial volume manipulation has created extensive arbitrage opportunities for arbitrage bots at the expense of investors
- Arbitrage bots now represent a significant portion of Grove’s on-chain trading volume
- Insider dumping, volume manipulation, and DEX-arbitrage are severe and destructive forces driving Grove’s falling price
Introduction
Grove’s trading volume is currently dominated by three groups: (1) insiders dumping, (2) artificial volume manipulation (aka wash trading), and (3) arbitrage bots. Prior research has documented extensive insider dumping and wash trading of Grove tokens.¹ This piece will focus on arbitrage bot activity and its deleterious impact on the GRV token price.
There is a growing narrative among project developers that arbitrage is a good thing. Unfortunately for investors, this statement is false.
Grove’s use of wash trading to artificially inflate its trading volume has created extensive opportunities for arbitrage bots to extract liquidity. While each individual arbitrage trade normally has a minor impact on the token’s price, over time, the cumulative effect is material sell pressure on the Grove token price.
Arbitrage Example
Arbitrage opportunities arise when a token is available at different prices on different exchanges. In its simplest form, an arbitrageur is able to buy the token at a low price on one exchange and simultaneously sell it at a higher price on a different exchange. The difference between the amount received vs. the amount paid is the arbitrage profit.
Let us analyze one of many arbitrage trades that occurred on May 5th, 2023:
In the above screenshot, we see that the arbitrage bot swapped 8.98 BNB for 9,024 GRV tokens and concurrently swapped those same tokens on GroveSwap for 9.14 BNB.
In executing this arbitrage trade, the arbitrageur earned a risk-free profit of 0.16 BNB.
But Why is this Bad?
Project developers argue that arbitrage is good for investors, as it prevents them from ignorantly buying at an exceptionally high price or selling at an exceptionally low price.
However, what these devs neglect to disclose is that every arbitrage trade extracts liquidity from the global liquidity pool.² Decentralized arbitrage is a zero-sum game. For the arbitrageur to win (i.e., earn a profit), someone must lose. As we will show, that loser is the Grove liquidity pool, and by extension, the investors.
Furthermore, extracting liquidity inherently drives down the price of the token. Let us look at an example.
In the above scenario, the price of GRV has diverged materially between PancakeSwap and GroveSwap. An arbitrageur now has the opportunity to earn a risk-free profit.
To execute the arbitrage, the following two swaps occur simultaneously (i.e., within one block):
- Swap 8.92 BNB for 10,000 GRV on PancakeSwap (where the price is lower)
- Swap 10,000 GRV for 10.17 BNB on GroveSwap (where the price is higher)
The total profit to the arbitrageur is 1.25 BNB. However, the arbitrage profit wasn’t created out of thin air. It had to come from somewhere. So, let us look at the net flow-of-funds:
The arbitrage swaps moved 10,000 GRV from PancakeSwap to GroveSwap. However, the whole 10.17 BNB did not flow to GroveSwap. Instead, it was split between PancakeSwap and the arbitrage bot.
Post arbitrage, we see the impact to liquidity pools:
Comparing the pre-trade to the post-trade liquidity pools, we see that the GroveSwap and PancakeSwap prices modestly converged. However, we also see that the Global Price declined from $0.31704 to $0.31684.
While the decline in price may seem immaterial, and it would be if arbitrage bot activity was infrequent, Grove’s campaign to artificially inflate trading volume has created extensive arbitrage opportunities. Arbitrage bots are now busy throughout the day extracting BNB from the Grove liquidity pool and pulling down the price.
Arbitrage Frequency
At the end of February, Grove’s DEX volume across both GroveSwap and PancakeSwap had dried up.³ With no trade volume, there were very few pricing dislocations across swaps.
In an attempt to attract a top centralized exchange into listing its token, the Grove team began a campaign to artificially inflate volume. After removing transaction taxes, it began a manipulation program to buy and sell GRV tokens to artificially inflate volume (i.e., wash trading).
Since most of the manipulation occurred on GroveSwap⁴, pricing dislocations across PancakeSwap and Safemoon Swap arose immediately. Arbitrage opportunities went from few and far between to several throughout each hour.
Today, much of the Grove trading activity on decentralized exchanges is from arbitrage bots extracting BNB from the Grove liquidity pools.
The above is a snapshot of the trading activity on GroveSwap from 9:51 to 11:43 AM. In that short time span, we observed seven arbitrage bot trades out of 16 total trades.
While some of the arbitrage transactions extracted less than 0.01 BNB from the liquidity pool, others, such as the following, extracted far more:
Concluding Remarks
While any one arbitrage trade is unlikely to materially effect the global price of GRV, the cumulative effect is considerable. Every day, significant amounts of arbitrage trades extract BNB from the Grove liquidity pools.
The relentless insider dumping and arbitrage transactions have created a persistent sell wall around the Grove price. To achieve any rise in price, new, large investors would be needed to exceed the substantial sell wall created by the Grove team.
Unfortunately for investors, Grove’s me-too, copy-paste swap, copy-paste blockchain, tier-2 CEX listings (which also induce arbitrage), and a headquarters in a baron location outside Dubai are unlikely to excite new investors. Once again, the loyal investors will become the exit liquidity for the team.
Appendix
- GroveCoin: Falsifying Volume & Holders for Exchange Listings
2. Global Liquidity Pool refers to the sum of all liquidity across decentralized exchanges
3. Twitter post on February 25, 2023 documenting falling trading volume in Grove:
4. Wash trading on a decentralized exchange generates significant swap fees. By executing the wash trades on Grove’s own swap, it avoids paying PancakeSwap or Safemoon Swap fees.
Cover Image
Artwork Credit: Cheese Coolman / @Cheese_Coolman1
