Arbitrage

The most common form, where an asset trades at different prices on two decentralized exchanges (DEXs). An arbitrageur buys the asset on the cheaper DEX and sells it on the more expensive one in a single atomic transaction.

• Example: Buying ETH on Uniswap where it's priced at $3,000 and simultaneously selling it on SushiSwap where it's priced at $3,010.
• Key Tools: Requires a flash loan to fund the trade and a smart contract to bundle the buy and sell, ensuring the entire sequence either succeeds or fails, eliminating capital risk.

Exploits price differences between a centralized exchange (CEX) and a decentralized exchange (DEX). This strategy often involves moving assets between venues, introducing settlement time and withdrawal delay risks.

• Example: Spotting ETH priced at $2,990 on Coinbase (CEX) and $3,005 on a DEX like Curve. The trader buys on the CEX, withdraws to their wallet, and sells on the DEX.
• Considerations: Slower than pure on-chain arbitrage due to CEX withdrawal times, making it susceptible to price slippage.

Involves three different assets within a single DEX or across interconnected liquidity pools to exploit pricing inefficiencies in the exchange rates. The trader cycles through three trading pairs to end with more of the starting asset.

• Example: On a DEX, trading: ETH -> USDC -> DAI -> ETH. If the implied exchange rate of ETH/DAI across this path differs from the direct ETH/DAI pool, profit is captured.
• Mechanism: Heavily reliant on complex algorithms to identify mispriced loops across multiple automated market maker (AMM) curves.

A strategy specific to perpetual futures markets. Traders capitalize on the difference between the perpetual contract price and the underlying spot price, as corrected by the periodic funding rate payment.

• Example: When the funding rate is highly positive, longs pay shorts. An arbitrageur can short the perpetual contract while going long on the spot asset, collecting the funding payments while remaining market-neutral.
• Outcome: This activity helps push the perpetual contract price back toward the spot index, enforcing market efficiency.

A subset of Maximal Extractable Value (MEV), where searchers profit from price dislocations caused by large, forced liquidations on lending protocols.

• Process: A large loan becomes undercollateralized, triggering a liquidation. The liquidation itself creates a large sell order, temporarily depressing the asset's price on a DEX.
• Arbitrage: A searcher's bot uses a flash loan to buy the discounted asset from the liquidation and instantly sell it at the higher market price on another venue, all within the same block.

Exploits price differences for the same asset on different blockchain networks (e.g., ETH on Ethereum vs. Wrapped ETH on Arbitrum). This involves using cross-chain bridges or native asset transfers.

• Example: Buying ETH on Avalanche where it's cheaper, bridging it to Ethereum, and selling it there at a higher price.
• Complexities: Introduces significant latency and bridge security risk, as assets are locked during the bridging process, making pure atomic execution impossible.

A strategy that exploits price discrepancies across three different assets or trading pairs, often within a single Decentralized Exchange (DEX). The trader cycles through three transactions (e.g., Token A → B → C → A) to end with more of the starting asset. This is common in automated market maker (AMM) pools where temporary price inefficiencies arise.

• Example: Buying ETH with USDC, swapping that ETH for DAI, then swapping DAI back to USDC for a profit.
• Execution: Heavily reliant on low-latency bots to capture fleeting opportunities.

The practice of profiting from price differences for the same asset on different blockchain networks. This involves using cross-chain bridges or atomic swaps to move assets between chains. It's more complex and carries bridge risk (e.g., security, latency).

• Key Challenge: Managing the settlement risk and timing across asynchronous networks.
• Tools: Protocols like LayerZero, Wormhole, and Chainlink CCIP enable these transfers.

Not a direct strategy, but a description of how arbitrageurs interact with Automated Market Makers (AMMs). When prices on an AMM diverge from the global market, arbitrageurs trade against its pools, correcting the price. This action generates swap fees for Liquidity Providers (LPs), making arbitrage a critical, if indirect, source of LP yield.

• Mechanism: The arbitrageur's profitable trade moves the pool's price back to parity.
• Result: LPs earn fees but may experience impermanent loss from the price movement.

An advanced strategy where an arbitrageur borrows a large sum of capital with no collateral via a flash loan, executes the arbitrage trade within a single blockchain transaction, repays the loan, and pockets the profit—all atomically. If the profit condition isn't met, the entire transaction reverts, eliminating default risk for the lender.

• Platforms: Primarily executed on Ethereum and compatible EVM chains using protocols like Aave and dYdX.
• Requirement: The entire profitable logic must be encoded in a smart contract.

The practice of continuously providing bid and ask quotes to facilitate trading and earn the spread. While related, it is distinct from arbitrage. A market maker profits from the consistent spread, while an arbitrageur profits from a one-off price discrepancy. Sophisticated firms often act as both.

• Key Difference: Market making is inventory-based and provides continuous liquidity; arbitrage is opportunistic and consumes liquidity.
• Automation: Both roles are dominated by algorithmic high-frequency trading (HFT) bots.

The total value that can be extracted from block production in excess of the standard block reward and gas fees, often through arbitrage and other transaction reordering techniques. Arbitrage is a primary source of MEV. Searchers run bots to find these opportunities and pay priority fees to validators to include their profitable transactions.

• Forms: Includes frontrunning, backrunning, and sandwich attacks alongside pure arbitrage.
• Impact: Can lead to network congestion and increased transaction costs for regular users.