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by Finage at October 4, 2021 4 MIN READ

Real-Time Data

Arbitrage and DeFi Strategy: New Opportunities for Trading Market

 

Having the right strategy can be a game-changer for investors, especially in DeFi markets. Let’s focus on the impact of arbitrage in this type of market, including the two most popular strategies. Before we can get into further details, take a look at some of the basics first.

 

Contents:

What Is DeFi?

What Is Arbitrage?

Yield Arbitrage

Cross-Exchange Arbitrage Strategy

How Useful Is Arbitrage in DeFi

Final Thoughts

 

What Is DeFi?

Decentralized markets are a promise of the future. And due to some of the activity we see on blockchain networks, we are getting closer to a world where a lot of trade will be conducted on such markets. DeFi (Decentralized Finance) simply refers to the efforts required to achieve a fully functioning decentralized network. It involves the development of financial infrastructure that will permit trade with any fear of corruption or any other forms of inefficiency.

 

We have seen the increase in popularity of DeFi, especially in the last couple of years. However, it has not yet achieved the reliability it deserves, which can be attributed to the type of trading strategy used and the general public perception of blockchain markets. Let’s focus on the former and talk about arbitrage as one of several DeFi strategies.

 

What Is Arbitrage?

Arbitrage as a concept of trade has been used for centuries. It refers to the process of buying and selling of assets in two different markets by taking advantage of the price differences of commodities in each.

 

Today, it is common to see that at any given moment the price of a commodity in one DeFi market differs from another. Arbitrage permits traders to make some profit by identifying such differences. The following subtypes of the arbitrage strategy exist.

 

Yield Arbitrage

Yield arbitrage can be applicable in the case where you have different lending assets. Investors take advantage of this strategy most when the markets are least competitive. However, although profit generation is highest during such cases, it is very difficult to identify how much could be generated after the strategy’s implementation. To have a close estimate of capacity, one has to look at the volume of assets to be traded as well as all available coins.

 

Traders can also stake crypto coins. This practice is known as yield farming and enables them to get as many rewards from crypto trading for any given period of time. Today, you can practice yield farming in various trading networks. Some of the most popular include:

  • Binance
  • Uniswap
  • PancakesWap

 

Uniswap and pancakes are also very common platforms for new traders to start a DeFi based business. They can be easily incorporated into their business and have a high potential for profit yields.

 

Cross-Exchange Arbitrage Strategy

Cross-exchange arbitrage is a tool that traders use to buy one asset at a low price and sell it for a significantly higher one after. Cross-exchange arbitration can be further broken down into two categories.

 

The first, intra-exchange involves putting all focus on a particular site. Any profit made in this strategy will be the result of buying assets now and reselling them at a later date at an elevated price. Cross-exchange works with the following principle:

  1. Look for various opportunities in the DeFi markets
  2. Buy cryptocurrency on a platform at the lowest price
  3. Transfer your cryptocurrency to a platform where the price is significantly higher
  4. Make your profit by selling on the new platform

 

Intra-exchange arbitration works perfectly for traders who have multiple operations. However, it also comes with some risks, which are mainly associated with timing. However, you still have a lot of factors working for meaning the chances of running into a loss is pretty low.

 

How Useful Is Arbitrage in DeFi

In the grand scheme of things, both yield and cross arbitrage are so insignificant that many traders don't really consider them for their DeFi operations. One of the major reasons for this is that the number of opportunities that arise is few and compared to other strategies, the amount of profit generated is not as impressive. With that being said, is there any reason why arbitrage should still be an option for traders today?

 

As far as relevance goes, arbitrage strategies are still pretty useful. Large DeFi platforms such as Uniswap still permit the implementation of this strategy by offering tools that help identify the price difference of assets on the platform and those on external markets. That being said, there could be a redefinition of the role arbitrageurs serve in the future, especially in conjunction with DeFi markets.

 

Arbitrage still plays a role in today's DeFi markets. Hever, as time progresses we will probably see that the value of arbitrage strategies will be changed. So, is arbitrage useful in DeFi? The simple answer is yes. As we get more tools and strategies that make decentralized markets more reliable, we have to remember that arbitrage is just another strategy that can be used in our arsenal.

 

Final Thoughts

Although DeFi markets represent a small portion of the overall trading operations of most investors, they can provide a good opportunity to create additional profit. By using the right strategies, traders can maximize their efforts on DeFi markets. We have looked at two valuable strategies that you can experiment with.

 

Each is unique and offers the chance of maximizing your trading regardless of what your goals are. If you are just starting out in crypto trading, giving arbitrage a shot could help you get more experience in implementing other strategies that you’ll ultimately need.

 


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