Arbitrage

Arbitrage is a trading strategy that involves buying an asset at a lower price on one platform and selling it at a higher price on another, profiting from the price difference. In crypto, arbitrage opportunities exist due to market inefficiencies across centralized exchanges (CEXs), decentralized exchanges (DEXs), or across different blockchain networks.

Arbitrage plays a key role in market efficiency, helping to align prices across platforms. It is used by individual traders, institutions, and automated bots operating at high speeds.

How Arbitrage Works

• Price Discrepancy Identified – A trader or bot spots a price difference for the same asset on two exchanges.
• Asset Purchase – The asset is bought on the platform where it is priced lower.
• Asset Sale – It is simultaneously sold on the platform where it is priced higher.
• Profit Realization – The trader earns a profit equal to the price difference minus transaction fees.
• Execution Speed Matters – Profitable arbitrage requires fast execution before the price gap closes.

Key Features

• Cross-Exchange Strategy – Involves two or more platforms, sometimes across chains.
• Time-Sensitive – Opportunities often exist for seconds or minutes before being corrected.
• Low Risk (Theoretically) – Profits are based on pricing gaps, not market speculation.
• Automated Trading – Most arbitrage is done via bots due to speed requirements.
• Supports Price Discovery – Arbitrage helps stabilize prices between fragmented markets.

Benefits of Arbitrage

• Profit Opportunity – Traders can earn consistent returns from price inefficiencies.
• Market Efficiency – Aligns prices across exchanges, reducing volatility.
• Non-Directional – Arbitrage doesn’t require guessing market trends — only price gaps.
• Scalable With Bots – Automation allows arbitrage to run at high frequency with minimal oversight.
• Useful for Stablecoins – Stablecoin arbitrage is common due to slight price deviations from $1.

Use Cases of Arbitrage

1. CEX-to-CEX Arbitrage – Buying BTC on Kraken and selling it on Binance if prices differ.
2. DEX-to-DEX Arbitrage – Swapping tokens between Uniswap and Curve for profit.
3. CEX-to-DEX Arbitrage – Buying on a DEX and selling on a CEX (or vice versa) when price differences arise.
4. Cross-Chain Arbitrage – Trading the same asset on different networks like Ethereum, Arbitrum, or BNB Chain.
5. Stablecoin Arbitrage – Profiting from slight price deviations in stablecoins like USDC, USDT, or DAI.
6. Flash Loan Arbitrage – Using uncollateralized loans to perform arbitrage trades within a single transaction (e.g. on Aave).