Grove’s trading volume is currently dominated by three groups: (1) insider dumping, (2) artificial volume manipulation (aka wash trading), and (3) arbitrage bots. Previous research has documented extensive insider dumping and wash trading of Grove tokens.¹ This article focuses on arbitrage bot activity and its detrimental impact on the GRV token price.
There is a growing belief among project developers that arbitrage is a good thing. Unfortunately for investors, that statement is false.
Grove’s use of wash trading to artificially increase its trading volume has opened up ample opportunities for arbitrage bots to generate liquidity. While each individual arbitrage trade typically has a small impact on the token’s price, the cumulative effect over time results in significant selling pressure on the Grove token’s price.
Arbitrage opportunities arise when a token is available on different exchanges at different prices. In its simplest form, an arbitrageur can buy the token at a low price on one exchange while selling it at a higher price on another exchange. The difference between the amount received and the amount paid is the arbitrage profit.
Let’s analyze one of many arbitrage trades that took place on May 5, 2023:
https://bscscan.com/tx/0x280d91cce0c52bf8510e68db93ee9da10c8cc70e97342c202c9b972786e222a9
In the screenshot above, we see that the arbitrage bot swapped 8.98 BNB for 9,024 GRV tokens and at the same time swapped the same tokens for 9.14 BNB on GroveSwap.
Executing this arbitrage trade, the arbitrageur made a risk-free profit of 0.16 BNB.
Project developers argue that arbitrage is good for investors because it prevents them from unknowingly buying at an exceptionally high price or selling at an exceptionally low price.
However, what these developers hide is that each arbitrage trade drains liquidity from the global liquidity pool.² Decentralized arbitrage is a zero-sum game. In order for the arbitrageur to win (i.e. make a profit), someone has to lose. As we’ll show, that loser is the Grove liquidity pool, and by extension, the investors.
Furthermore, the withdrawal of liquidity inherently drives the price of the token lower. Let’s look at an example.
In the scenario above, the price of GRV is significantly different between PancakeSwap and GroveSwap. An arbitrageur now has the opportunity to make a risk-free profit.
To execute the arbitrage, the following two swaps take place simultaneously (i.e. within one block):
- Swap 8.92 BNB for 10,000 GRV at PancakeSwap (where the price is lower)
- Swap 10,000 GRV for 10.17 BNB on GroveSwap (where the price is higher)
The total profit for the arbitrageur is 1.25 BNB. However, arbitrage profit was not created out of thin air. It had to come from somewhere. So let’s look at the net cash flow:
The arbitrage swaps moved 10,000 GRV from PancakeSwap to GroveSwap. However, not all of the 10.17 BNB went to GroveSwap. Instead, it was split between PancakeSwap and the arbitrage bot.
After arbitrage, we see the impact on liquidity pools:
Comparing the pre-trade versus post-trade liquidity pools, we see that GroveSwap and PancakeSwap prices converged slightly. However, we also see that the global price has dropped from $0.31704 to $0.31684.
While the price drop may seem insignificant, which it would if arbitrage bot activity were rare, Grove’s campaign to artificially increase trading volume created extensive arbitrage opportunities. Arbitrage bots are now busy all day extracting BNB from the Grove liquidity pool and dragging the price down.
At the end of February, Grove’s DEX volume on both GroveSwap and PancakeSwap had dried up.³ With no trading volume, there was very little price change between swaps.
To get a leading centralized exchange to list their token, the Grove team launched a campaign to artificially inflate the volume. After abolishing transaction taxes, it launched a manipulation program to buy and sell GRV tokens to artificially increase volume (i.e., wash trading).
Since most of the manipulations took place at GroveSwap⁴, price distortions at PancakeSwap and Safemoon Swap immediately occurred. The number of arbitrage opportunities increased from infrequent to several per hour.
Today, much of Grove trading activity on decentralized exchanges is handled by arbitrage bots extracting BNB from Grove liquidity pools.
The above is a snapshot of trading activity on GroveSwap from 9:51am to 11:43am. In this short span of time, we observed seven arbitrage bot trades out of a total of 16 trades.
While some of the arbitrage trades took less than 0.01 BNB from the liquidity pool, others took far more, like the following:
While a single arbitrage trade is unlikely to materially affect the global price of GRV, the cumulative effect is significant. Significant amounts of arbitrage trades are withdrawing BNB from the Grove liquidity pools on a daily basis.
The relentless insider dumping and arbitrage deals have created an ongoing sell wall around the Grove price. Achieving a price increase would require large new investors, breaking through the substantial selling 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 lead to arbitrage), and a headquarters in a Baron location outside of Dubai are unlikely to attract new investors inspire. Once again, the loyal investors become the exit liquidity for the team.
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