In the cryptocurrency world, there is one indispensable group of participants. They help the market to operate effectively, make prices of the same asset in different markets towards uniform, bring a boom in liquidity, and also make profits during the process — — arbitrageurs.
The crypto market is still in its infancy stage, and is developing from CeFi to DeFi. There is a lack of mature trading systems, which leads to huge arbitrage opportunities and various of tactics. This article will show you some simple and potential arbitrage opportunities on SheepDex.
What is Arbitrage
First, let’s have a brief introduction of arbitrage. To put it simply, arbitrage is the simultaneous purchase and sale of the same asset in different markets to profit from the price differences. It also provides a mechanism to ensure that prices do not deviate substantially from fair value for long periods of time.
Usually there are more arbitrage opportunities in immature markets. In traditional markets, because of the large scale and the continuously improving trading system, there is less room for arbitrage, leading more professionals to turn their eyes to the rampant growing crypto markets.
Crypto arbitrage opportunities first appeared from the spot price differences among multiple exchanges. With the emergency of derivatives, spot-future arbitrage also arose. Until the recent heat of DeFi, the focus of arbitrageurs has been shifted again.
Arbitrage Opportunities on SheepDex
Based on Binance Smart Chain, SheepDex adopts the most advanced V3 AMM mechanism with innovations such as concentrated liquidity, range orders, and multiple fee tiers. In the near future, it will integrates derivatives trading with zero funding rate.
SheepDex also supports triple incentives, including LP rewards, yield farming and transaction rewards, at the same time. It means you can earn more incomes with less capitals on SheepDex. Besides, there are also arbitrage opportunities for you to earn some extra incomes.
- Scenarios 1 — Arbitrage opportunity for LPs when LP reward > impermanent loss
Each liquidity provider (LP) now can have his own personalised price curve with SheepDex’s V3 AMM by choosing a custom price range to provide liquidity. In this way, it is possible to earn most transaction fees within the specified range with less funds, and to maximise the capital efficiency.
For LPs, the biggest concern is impermanent loss, and this may cause some serious loss. On SheepDex, 50% of the transaction fees to LPs as LP rewards. As long as the LP rewards > impermanent loss, being a LP is profitable. Here we share with you two ways to ensure this:
First, you can provide liquidity for trading pairs of stable coins. With SheepDex, you could provide all your capital to the price range where most transactions happen, like the 0.99–1.01 of USDT/BUSD, so that your liquidity is very concentrated and could earn more fee incomes.
As the price fluctuations of stable coins are often very small, and impermanent losses can be negligible. In this way, basically you won’t lose money due to impermanent loss, and fee income is pure profit.
However, due to the low risk, trading pair of stable coins is always the first choice of many LPs. A large amount of funds will be gathered in those pairs, the competition is fierce, and the proportion of your LP will become smaller.
Another way is to provide liquidity for two related assets, such as BNB-CAKE, BNB-Alpaca, whose prices are often rise and fall at the same time. The impermanent loss of this kind of trading pairs is also relatively small, making the LP reward > impermanent loss situation very possible.
- Scenarios 2 — Arbitrage opportunity for traders when transaction reward > transaction fee
As a trader, you can earn rewards of SPC when you make transactions on SheepDex.
SheepDex offers better liquidities and depths in the price ranges where most transactions happen during a certain period of time due to the V3 AMM mechanism. Better depth means lower slippage, and it’s perfect for large transactions.
The larger the transaction volume, the more rewards of SPC. The better the SPC price performance, the greater the arbitrage space. As long as the transaction reward > transaction fee, traders are profitable.
- Scenarios 3 — Exchange arbitrage opportunity from three pools of a same token
Most DEX only offers one standard fee rate, however, SheepDex provides three tiers of fee rates, which are 0.1%, 0.2% and 0.5%. Through different tiers of fees, LPs could get more benefits if they bear more risks, and vice versa.
Each trading pair’s liquidity will be more concentrated in a certain pool with one of the three fee rate, according to the impermanent loss risk. However, there will still be three pools of the same trading pair on the platform.
Under the AMM mechanism, the token price is determined by the function x*y=k, where x is the number of token A, y is the number of token B, and k is a constant. With different liquidity and transaction volumes, the price of the same toke will be different in those three pools. And the strategy here is simple: buy low in one pool, and sell high in another pool. Traders can earn profits from the price differences, and can also earn transaction rewards.
Other opportunities
Like mentioned above, there is exchange arbitrage opportunities within the three pools on SheepDex. This kind of opportunity also exist between SheepDex and other DEXs, and SheepDex and CEX.
Exchange arbitrage is one of the most common type of arbitrage trading, and has been around for a long time. As most DEXs adopt oracle pricing and AMM mechanisms, there are always pricing differences of the same token between different DEXs, and between a CEX and a DEX. As long as there is a spread, there is room for arbitrage.
Triangular arbitrage is another common type of arbitrage trading, which involves two trading pairs of three tokens. For example, you notice that on SheepDex there is a price discrepancy between three different cryptocurrencies, and can exchange them for one another in a kind of loop.
There will also be spot-future arbitrage opportunities on SheepDex when there is a price difference between spot and contract after the derivative trading is online.
Since the DeFi market is still new and booming, there are a lot of arbitrage opportunities that worth exploring. In the future, arbitrage mechanisms will always exist and become more abundant, helping the market develop more effectively.
However, the threshold of arbitrage is also increasing, making it more suitable for professional arbitrageurs and organisations. Besides, it’s also important to note that the tactics mentioned above are only potential opportunities. Many risks may be involved in actual arbitrage operations. Profits are not guaranteed and financial loss is also possible in some cases.
Trade at your own risk, and do let us know if you have better tactics!
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