ICHI

Many may have come across the term “arbitrage trading”, but not everyone knows how it actually works. There are different strategies for trading cryptocurrencies and one of them is crypto arbitrage trading, which has become increasingly popular in the cryptocurrency market in recent years. This trading strategy involves taking advantage of price differences between two or more cryptocurrency exchanges, allowing traders to capitalize on slight price discrepancies of a digital asset. In this blog post, we will explore the basics of crypto arbitrage trading, how it works, and the risks and benefits associated with it.What Is Arbitrage Trading?Arbitrage trading is a trading practice that exploits price discrepancies in one asset across multiple exchanges. This practice existed in traditional financial markets long before the emergence of the crypto market, where traders can find opportunities in any tradable asset, including stocks, bonds, and fiat currencies.It is fair to say that there is more hype around crypto arbitrage trading in particular due to more opportunities for arbitrage traders to find profitable price discrepancies. Since crypto markets are highly volatile prices are more likely to fluctuate over a certain time period, allowing for more opportunities.How Does Crypto Arbitrage Trading Work?Arbitrage trading is all about buying and selling crypto assets from one exchange to another. If you buy Bitcoin on exchange A, where the price is $20,000, and sell on exchange B, where the price is $20,200, you can profit on the difference, earning $200 per Bitcoin.Specifically, in crypto, exchanges can have slightly different prices for specific assets. Centralized exchanges use something called an order book system to determine pricing. This order book is simply a list of buy and sell orders, which determine the real-time price of that specific asset on the exchange. This is because these values represent the highest and lowest limits at which a transaction can be executed immediately. So in effect, order book systems see the price of an asset entirely controlled by supply and demand across the market, and respond in real-time to those dynamics.Decentralized crypto exchanges, however, use a different method for pricing crypto assets. They operate using <a href="https://medium.com/ichifarm/concentrated-liquidity-market-makers-clmm-vs-automated-market-makers-amm-ca5006631835" rel="noopener noreferrer nofollow">Automated Market Makers</a> (AMMs), which rely on <a href="https://medium.com/ichifarm/liquidity-pools-explained-c17e97da3bd9" rel="noopener noreferrer nofollow">liquidity pools</a>. Essentially, traders buy and sell assets using the platform’s liquidity pools. Each pool is funded by people who deposit their crypto assets to provide liquidity that others trade against in exchange for a proportionate share of the pool’s transaction fees. This is precisely what <a href="https://ichi.org/" rel="noopener noreferrer nofollow">ICHI</a> offers, effortless, decentralized market-making empowering sustainable on-chain returns and deep liquidity. Users can deposit single-token deposits, which are deployed into Uniswap V3 liquidity pools in order to earn trading fees for the depositor (a.k.a yield).These liquidity pools have no central authority—they use smart contracts to operate. In an order book system, the price of assets is determined by the free market, always prioritising the highest bid and the lowest offer price for users. Instead, an AMM determines the price of the asset in each liquidity pool by analysing the pool’s internal supply and how it balances with its trading pair. This means prices on an AMM automatically change depending on the demand within its own, closed ecosystem, rather than dynamics of the wider market.If a trader executes a large trade and the ratio in that particular pool changes, it can create big price differences compared to the average price reflected across all other exchanges. For example, if a trader wanted to swap $500k of LINK for ETH, the composition of the pool will change, removing $500k worth of ETH from this specific pool and thus making it more expensive, since there will be a lesser amount of ETH in the pool, until it is balanced again.Decentralized exchanges rely on arbitrage traders to balance the token pairs in their liquidity pools, so they perform an important function. They adjust the supply of tokens in a trading pair, naturally helping to balance the quoted price.Toxic ArbitrageHowever, there are toxic arbitrageurs who manipulate the price of a token through a series of transactions to create a price discrepancy between the Decentralized exchange and other exchanges. Toxic arbitrage is considered “toxic” because it can harm the overall health of the DeFi ecosystem by creating instability, volatility, and distrust in the space. This type of trading strategy can also have a negative impact on liquidity pools, which rely on stable prices to maintain liquidity. Manipulating the price and instability in the liquidity pools leads to slippage and decreased liquidity.There are protocols emerging in the DeFi space, which are looking to solve the issue of toxic arbitrage. <a href="https://linktr.ee/soloamm" rel="noopener noreferrer nofollow">SOLO</a> is a new AMM, that attracts liquidity with simple, single-token deposits and toxic arbitrage counter-measures refined on Uniswap V3. The DeFi space is continuously evolving and we are confident that toxic arbitrage will be mitigated. Every liquidity provider has the right to earn with liquidity provision since they are performing arguably the most important function in DeFi—providing liquidity and making DeFi possible.Risks and BenefitsCrypto arbitrage trading comes with its own set of risks and benefits. Some of the benefits of crypto arbitrage include:<ol><li>Potential for profit: If executed correctly, crypto arbitrage trading can be a profitable trading strategy.</li><li>Risk management: Since the price differences between exchanges are typically small, crypto arbitrage trading can be a low-risk trading strategy.</li><li>Diversification: Crypto arbitrage trading can provide diversification to a trading portfolio since it is a separate trading strategy from other trading strategies.</li></ol>However, there are also risks associated with crypto arbitrage trading, including:<ol><li>Losses: Since crypto arbitrage trading requires speed and precision, there is a risk that a trader may not be able to execute the trade in time, resulting in a missed opportunity or a loss.</li><li>Exchange risk: Crypto arbitrage trading requires traders to have accounts on multiple exchanges, which can expose them to exchange risks such as hacking and fraud.</li><li>Transaction costs: Transaction fees are paid to exchanges when purchasing and selling cryptocurrencies and there are also platform fees for withdrawing and depositing crypto assets. These fees continue to fluctuate, varying from exchange to exchange.</li></ol>Not Your Keys, Not Your CryptoWhichever trading strategy you choose, it’s always important to consider security and avoid entrusting any third party with your funds. One of the most important aspects of securing your digital assets is <a href="https://medium.com/ichifarm/self-sovereign-finance-your-keys-your-crypto-45b6ee2aecef" rel="noopener noreferrer nofollow">self-custody</a> and the management of your private keys.By using a hardware wallet, backing up your private key, and being careful with online storage, you can protect your assets and ensure your private key remains secure. Remember never to share your private key, use multi-factor authentication, and keep your software up-to-date to stay ahead of potential security threats. If you want to learn more about how to keep your seed phrase safe, check out our <a href="https://medium.com/ichifarm/how-to-keep-your-seed-phrase-safe-d4da214cddee" rel="noopener noreferrer nofollow">blog</a>.TakeawaysOverall, arbitrage traders in DeFi play an important role in the ecosystem by helping maintain price stability and liquidity between DeFi protocols, if this power is not abused by way of “toxic arbitrage”, which on the other hand can harm the entire DeFi space. Crypto arbitrage trading can be a profitable trading strategy for traders who are willing to take on the associated risks and is generally considered a lower-risk strategy because it does not require predictive analysis. However, traders should be aware of the potential risks and take steps to mitigate them.Learn more by visiting the ICHI website, <a href="https://medium.com/ichifarm" rel="noopener noreferrer nofollow">Medium</a>, <a href="https://twitter.com/ichifoundation" rel="noopener noreferrer nofollow">Twitter</a>, <a href="https://t.me/ichifarm" rel="noopener noreferrer nofollow">Telegram</a>, or <a href="https://discord.com/invite/Bm6pUHjHUC" rel="noopener noreferrer nofollow">Discord</a>.

Crypto Arbitrage Trading

ICHI Foundation

2023년 4월 11일에 게재된 다른 기사

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