Cross-exchange arbitrage involves buying a stablecoin on one platform where it's undervalued and simultaneously selling it on another where it's overvalued. This exploits temporary price inefficiencies between centralized and decentralized exchanges.

• Requires fast execution to capture fleeting price differences before markets correct.
• Example: Buying USDT on Exchange A for $0.995 and selling it on Exchange B for $1.005.
• This matters as it provides market liquidity and helps maintain price parity across the ecosystem.

DeFi yield arbitrage leverages interest rate differentials between lending protocols and liquidity pools. Traders borrow stablecoins at a low rate to supply them to a platform offering a higher yield, pocketing the spread.

• Involves managing smart contract risks and gas fees.
• Example: Borrowing DAI from Compound at 3% APR to supply to Aave at 5% APR.
• This matters for users seeking to generate yield with relatively low price exposure, though it carries protocol risk.

Minting/redemption arbitrage capitalizes on deviations between a stablecoin's market price and its underlying collateral value. When the price falls below $1, arbitrageurs buy the stablecoin and redeem it for $1 worth of collateral, profiting from the difference.

• Directly relies on the stability mechanisms of collateralized stablecoins like DAI or LUSD.
• Example: Buying DAI for $0.98 and redeeming it for $1 of locked ETH collateral via MakerDAO.
• This is crucial for maintaining the peg and ensuring the stablecoin's long-term stability.

Cross-chain bridge arbitrage exploits price differences for the same stablecoin on separate blockchain networks. Price imbalances can occur due to varying liquidity or bridge congestion between chains like Ethereum, Avalanche, or Polygon.

• Requires using cross-chain bridges and managing native gas tokens on multiple networks.
• Example: Buying USDC.e on Avalanche for $0.99, bridging it to Ethereum, and selling it for $1.01.
• This matters as it helps harmonize prices across the multi-chain landscape, improving capital efficiency.

Cash-and-carry arbitrage is a low-risk strategy involving futures or perpetual contracts. An arbitrageur buys the stablecoin spot and simultaneously sells a futures contract at a higher price, locking in a risk-free profit if the futures are trading at a premium.

• Common in markets with active derivatives trading like Binance or dYdX.
• Example: Buying USDC spot for $1 and selling a quarterly futures contract for $1.02.
• This matters for institutional players and sophisticated traders to capture basis spreads with minimal directional risk.

Slippage occurs when the final execution price of a trade differs from the expected price, eroding arbitrage profits. This is especially prevalent in low-liquidity pools or during high volatility.

• Large orders in thin markets can move the price significantly against the trader.
• Example: A $500k USDT/USDC swap on a small DEX causing a 0.5% unfavorable price shift.
• Why this matters: It can turn a theoretically profitable trade into a loss, demanding sophisticated execution algorithms and careful sizing.

Smart contract vulnerabilities expose arbitrageurs to exploits, hacks, or failures in the underlying DeFi protocols they interact with, such as automated market makers (AMMs) or lending platforms.

• Bugs or logic errors can lead to fund lockups or theft.
• Example: The 2022 Nomad Bridge hack, which disrupted cross-chain arbitrage routes.
• Why this matters: A single exploit can result in total loss of capital, necessitating rigorous protocol audits and diversification across platforms.

Regulatory actions or a loss of confidence can cause a stablecoin to depeg, deviating significantly from its intended 1:1 value with the underlying asset (e.g., USD).

• Sudden regulatory crackdowns can freeze assets or ban trading pairs.
• Example: The temporary depegging of USDC following the 2023 Silicon Valley Bank collapse.
• Why this matters: Arbitrage positions relying on a stable peg can suffer catastrophic losses if one side collapses, requiring constant monitoring of news and collateral health.

Network congestion on blockchains like Ethereum leads to high and unpredictable gas fees, which can consume a large portion of arbitrage profits or cause critical transaction delays.

• During peak demand, simple swaps can cost hundreds of dollars in fees.
• Example: An arbitrage bot failing to submit a transaction during an NFT minting frenzy, missing the opportunity.
• Why this matters: Profit margins are often razor-thin, making fee management and layer-2 solutions essential for viability.

Counterparty risk involves the failure of a centralized exchange (CEX) or intermediary to fulfill its obligations, while custodial risk relates to holding assets on these platforms.

• Exchange insolvencies (e.g., FTX) can lead to frozen withdrawals and asset loss.
• Example: An arbitrageur's capital being trapped on a CEX that halts operations.
• Why this matters: It threatens the entire capital base, pushing strategies towards non-custodial solutions and strict exchange due diligence.

Oracle manipulation occurs when the price feeds used by DeFi protocols are artificially skewed, leading to incorrect arbitrage signals and potentially exploited liquidations.

• Attackers can "flash loan" to temporarily distort a price feed on a specific DEX.
• Example: The 2020 bZx attack, where manipulated oracle prices enabled profitable but illegitimate trades.
• Why this matters: Reliance on faulty data can trigger erroneous trades, requiring the use of decentralized, time-weighted average price (TWAP) oracles.