The fastest boxer in the world, Manny Pacquiao does 8 punches in a second. This is literally faster than the blink of a human eye. That is why Manny is the World Champion in his weight class. But can you imagine a fight where one of the boxers is 1,000 times faster? What if 100,000 times? The result would be obvious.

Speed is the most important and even determinant factor for many situations, so after reading this article you will understand that even a trifling fraction of a second might give you time to execute some significant process.

The puff

To illustrate, a thermonuclear reaction releases almost 10 times more energy than a nuclear fission reaction of uranium or plutonium. However, a thermonuclear reaction is not an easy thing to accomplish. Let me give you a brief explanation of how a thermonuclear reaction can be ignited.

First of all, a thermonuclear reaction is the fusion of two light atomic nuclei, most often deuterium and tritium (both are isotopes of Hydrogen) into heavier nuclei of helium. The reaction is just as simple as:

2H+3H -> 42He + 10n + E

E in this equation stands for the energy released, which is huge (17,6 MeV) in this reaction. This is exactly what we are looking for – energy!

Meanwhile, there is a small problem here called the Coulomb barrier. School physics taught us that particles with the same charge (either positive or negative) repulse each other. So it takes enormous effort to push two positively charged nuclei together and make them react. The only way is to heat the deuterium and tritium fuel to millions of Kelvins. A temperature like this is achievable only with plasma, which leads to the other problem… Plasma can destroy any material on Earth.

The most suitable way to create plasma is to explode a small plutonium bomb first. This will create the necessary high temperature. Another trick is to let it explode inside the sphere with the thermonuclear fuel to create huge pressure and overcome the Coulomb barrier.

Small bonus – everything should be done in the split seconds (literally nano (10-9)-seconds) before the first explosion is destroyed by the bomb itself.

The solution was developed in the Soviet Union with a very fresh and surprising approach. Soviet scientists decided to make TNT explode inside of the sphere where the uranium core is placed. The deuterium-tritium core was located near the uranium, as shown in the Picture 1 below.

Picture 1. The puff

TNT starts the reaction by creating huge pressure inside the sphere with the uranium and immediately brings it to critical mass. The uranium, in turn, starts nuclear decay, X-raying the bomb cover to create high-temperature plasma. As long as the speed of X-rays is the speed of light, it is faster than the speed of the TNT explosion, so it looks like there is a time to run a thermonuclear reaction. In addition, inside the deuterium-tritium core, there is a cylinder with plutonium which is detonated as well. Finally, the combined high-temperature plasma and huge pressure break the Coulomb barrier and ignite the thermonuclear reaction.

Physicists made some calculations. It turns out that TNT impact speed is around 3,000 m/sec which gives 1,5-2 m/s to destroy the core. X-ray speed is 300,000,000 m/s which is 100,000 times faster. This is as if Manny Pacquiao would be boxing for the title with a challenger under the influence of a barrel of tranquillizer.

In reality, the very sophisticated equations were giving nano-seconds of latency. This is impossible for the human mind to perceive, but enough for physics.

The first bomb constructed around this idea was tested in 1953 in the Soviet Union and almost immediately after this in the US. The construction of the bomb is called “the puff” because of this layering idea of placing the active elements inside. The key invention, however, is executing the powerful processes in a nano-second time frame. This is the true power of time!

The thermonuclear bomb remains the most dangerous and powerful weapon on Earth.

High-frequency trading

Are there any other areas where split seconds may have the key and definitive advantage? Yes, there are. They are HFT – high-frequency trading.

Its rather straight-forward to understand in the traditional finance world, but we are in crypto, the complexity of everything here doubled (sometimes tripled).

HFT exists in both the centralized and decentralized trading world within crypto.

First of all, let us understand how exchanges work.

Old exchanges were full of people yelling prices and names of assets at each other. This was the prototype of the order book that is in use at current exchanges. Today all exchanges are computerized. They record orders to buy or sell assets into the book. When an order matches with the current asset price, a deal is executed by transferring assets to the buyer and money to the seller. This sounds very easy until you start digging deeper into the technology. You are probably aware that nothing in our Universe is instant. The fastest speed is the speed of light, so it takes time for any signal to journey from the trader’s computer to the exchange server, to be executed and the result to be sent back. Usually, this takes just split seconds, milliseconds to be precise so this seems to be instant to any human, but not to the computer. If you set your computer closer to the server of the exchange, lay straight and direct cable to it and use the most powerful computer processor, you will be able to get connected to the order book faster. In this case, the latency can be shortened from milliseconds to microseconds, so you are going to have plenty of time to spare. HFT can execute the most profitable orders even before all the rest of the traders notice them. Moreover, HFT can take the order at the time when you push the “buy” button. Speed is the key in trading, whatever the strategy is.

Now the good old proverb “time is money” sounds much clearer and straightforward. Every millisecond has its own price and this price is steep.

So what’s next? Welcome to the DEFI HFT world.

DEFI could very possible to be the new way to get ahead, especially for HFT traders, where the tools and techniques are quite different compare to trading at conventional exchanges. The Alpha-chasing opportunities in DEFI world are much greater greatly due to this is a field that is not as saturated and undiscovered.

To start with a big picture, the common battle-ground here is what is known as AMM (Automated Market-maker), such as Uniswap, Pancakeswap, Balancer and etc. The trading mechanism implemented in AMM is far from being perfect in the perspective of market efficiency and its conventional HFT trading strategies hardly worked here, this requires the trader to think in a truly blockchain way, familiarizing with each blockchain network characteristics, and eventually create a strategies that chase the alpha within it.

The most common strategies including (some might be seen as malicious)

  • Special arbitrage bots to anticipate and profit from ordinary users’ trades
  • Paying higher fees to get priority for practices like front-running ( this require the trader to constantly scan the whole network to discover such opportunities, and fast enough to intercept the profitable transaction.)
  • Market exploiting behaviors that mimic the wall-street HFT traders
  • Yield arbitrage like cross-asset single platform interest rate arbitrage
  • Flash loan arbitrage (very malicious), it’s a type of DEFI attack where trader takes out a flash loan (in a form of uncollateralized lending) from a lending protocol and uses it in conjunction with various types of gimmickry to manipulate the market in their favor.

DEFI represents one of the most novel tech solutions that continuously triggered financial, trading and especially HFT innovation. Whether you are a classical HFT traders or a vivid investor in the crypto world, its good to understand the mechanism of both Traditional and Crypto world HFT player is using, for the sake of your own “new understand” advancement, and better equipped yourself in the new era.

 

Vladimir Demin, VRM Chairman

Shawn Chong, VRM VP