Bots, Arbitrage, and Price Alignment: Why They’re Good for LPs

By Jamie McCormick, Co-CMO, Stabull Labs

The seventh article in the 15 part “Deconstructing DeFi” Series.

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The transactions we traced on Stabull make one thing clear: arbitrage bots are not an anomaly or a side effect. They are a core part of how decentralised markets function — and, in many cases, they are the reason LPs get paid at all.

What arbitrage bots actually do

At their simplest, arbitrage bots look for price differences.

They monitor many venues simultaneously, comparing prices for assets that should trade close to the same value. When a discrepancy appears, they buy the underpriced asset and sell the overpriced one, often within the same transaction.

This process is not speculative. It is mechanical. If the trade cannot be executed profitably after fees and gas costs, it simply does not happen.

Why arbitrage exists in DeFi

In traditional markets, prices are aligned by centralised exchanges and professional market makers operating continuously.

DeFi does not have that luxury.

Liquidity is fragmented across hundreds of pools and venues. Prices move asynchronously. Without arbitrage, prices would drift — sometimes significantly — away from real-world reference values.

Arbitrage is the mechanism that pulls prices back into alignment.

How this relates to LPs

From an LP’s perspective, arbitrage is often misunderstood as value extraction. In reality, arbitrage is a fee-paying service.

When an arbitrage bot trades through a pool, it pays the same swap fee as any other trader. The bot’s profit comes from price discrepancies elsewhere, not from taking fees from LPs.

In effect:

• LPs supply liquidity
• arbitrageurs use that liquidity to correct prices
• LPs are compensated through fees

Without arbitrage, prices would remain stale, and LPs would bear far greater risk.

Why Stabull attracts arbitrage flow

Stabull’s oracle-anchored pricing changes the typical arbitrage dynamic.

On traditional AMMs, large imbalances can create significant mispricing, which arbitrageurs exploit aggressively. This can result in sharp, loss-inducing corrections for LPs.

On Stabull, pricing remains anchored to external references. When other venues drift, arbitrage flow often routes into Stabull rather than out of it.

In this scenario, Stabull acts less like a source of mispricing and more like a stabilising reference point.

That makes arbitrage through Stabull:

• more frequent
• smaller per trade
• less damaging to LP positions

What we observed on-chain

In the transactions we reviewed, arbitrage activity had a distinct signature:

• trades executed atomically
• minimal slippage
• small but consistent fee payments
• repeated patterns across time

There were no large, one-off extractions. Instead, there was steady, mechanical activity — the kind that indicates a pool is being used to keep markets in balance.

Arbitrage without incentives

One of the most important observations was that this activity occurred without incentives.

No liquidity mining rewards were driving these trades. No artificial volume was created to farm tokens. Arbitrageurs were trading purely because the execution made economic sense.

This is the strongest form of validation a liquidity pool can receive.

A healthier mental model

Rather than viewing bots as adversaries, it is more accurate to think of them as:

• automated market janitors
• constantly cleaning up pricing discrepancies
• paying LPs for the privilege

In well-designed systems, arbitrage is not something to be feared. It is something to be harnessed.

Why this matters going forward

As Stabull continues to be used as part of broader execution flows, arbitrage activity will likely increase — not as a sign of exploitation, but as a sign of relevance.

For LPs, this means:

• more consistent fee generation
• less reliance on incentives
• exposure to economically meaningful trades

In the next article, we’ll look at another invisible but essential participant in modern DeFi execution: solvers and professional routing systems, and why their presence is an even stronger signal of protocol maturity.

About the Author

Jamie McCormick is Co-Chief Marketing Officer at Stabull Finance, where he has been working for over two years on positioning the protocol within the evolving DeFi ecosystem.

He is also the founder of Bitcoin Marketing Team, established in 2014 and recognised as Europe’s oldest specialist crypto marketing agency. Over the past decade, the agency has worked with a wide range of projects across the digital asset and Web3 landscape.

Jamie first became involved in crypto in 2013 and has a long-standing interest in Bitcoin and Ethereum. Over the last two years, his focus has increasingly shifted toward understanding the mechanics of decentralised finance, particularly how on-chain infrastructure is used in practice rather than in theory.