Arbitrage

What is Arbitrage?

Arbitrage is the practice of buying an asset at a lower price in one market and simultaneously selling it at a higher price in another. This exploits temporary price inefficiencies between different exchanges or platforms.

How does Arbitrage work?

1. Bots or traders monitor the price of an asset (e.g., ETH) across multiple venues.
2. If ETH is $3,000 on Exchange A and $3,010 on Exchange B, an opportunity exists.
3. The trader buys ETH on Exchange A and sells it on Exchange B immediately.
4. The difference ($10) minus transaction fees and gas is the net profit.
5. This buying and selling pressure eventually aligns the prices across both markets.

Why does Arbitrage matter?

Arbitrage is the primary mechanism that keeps asset prices consistent across the global crypto ecosystem. It provides liquidity and ensures that decentralized exchanges (DEXs) stay in sync with centralized exchanges (CEXs).

Key features of Arbitrage

• Risk-free (theoretically) profit
• Market efficiency mechanism
• Requires high-speed execution
• High competition between bots
• Often utilizes flash loans in DeFi

Examples of Arbitrage

• Buying BTC on a local exchange and selling it on a global exchange for a premium.
• Using a flash loan to trade between Uniswap and SushiSwap pools.
• "Triangular arbitrage" within a single exchange (e.g., BTC to ETH to USDC to BTC).