Hello everyone, I am Paul Miyi, a small programmer. Here is our 7th day of learning blockchain from scratch together (if you are interested in blockchain technology, you can follow me and learn together). Today we want to talk about arbitrage (also known as '搬砖').
1. What is Arbitrage
In the blockchain and cryptocurrency field, 'arbitrage' is a common trading strategy that refers to exploiting price differences between different markets or platforms to conduct buy and sell operations and profit from the price differences. This strategy is typically used between different exchanges or between different markets within the same exchange.
2. Types of Arbitrage
1. Cross-Platform Escape (Inter-exchange Arbitrage)
This is the most common way of arbitrage, which involves trading the same asset (such as Bitcoin, Ethereum, etc.) between different exchanges based on price differences. For example:
Assuming the price of Bitcoin on Exchange A is $30,000, while on Exchange B it is $30,100.
Investors can buy Bitcoin at a low price on Exchange A and then transfer it to Exchange B to sell, making a profit of $100.
Actual Operational Steps:
Buy cryptocurrencies on exchanges with lower prices.
Transfer the purchased cryptocurrencies to exchanges with higher prices.
Sell at the exchanges with higher prices to profit from the price difference.
Risks:
Transfer Fees: Blockchain transfers sometimes require high fees, especially during network congestion, which can eat into profits.
Transaction Delays: Cryptocurrency transaction confirmations sometimes take time, and market prices may fluctuate during this period, leading to missed arbitrage opportunities.
Liquidity Issues: In some low liquidity exchanges, price differences may disappear quickly.
2. Cross-Currency Arbitrage
Cross-Currency Arbitrage refers to operations that exploit price differences between different currencies within the same exchange. For example, in a single exchange, you can use the ETH/BTC trading pair to execute buy and sell operations to earn the price difference. This method does not involve transfers between different platforms, making operations relatively convenient.
Example:
Within a single exchange, the price fluctuation of ETH/BTC leads you to discover a significant difference between the buy and sell prices of the same trading pair. You can take advantage of this price difference to buy low and sell high.
Some exchanges also offer trading pairs like BTC/USDT and ETH/USDT, allowing you to engage in multiple arbitrage opportunities through these pairs.
3. Homogeneous Arbitrage (such as arbitrage between stablecoins)
This type of arbitrage usually occurs between stablecoins with closely related prices, such as USDT, USDC, DAI, etc. Although their prices are typically close to $1, slight price fluctuations can occur due to changes in market supply and demand, such as 1.001 USD vs 0.999 USD.
Example:
If you find that the price of USDT is higher than $1 while the price of USDC is lower than $1, you can profit from the price difference by buying low and selling high.
4. Triangular Arbitrage
Triangular arbitrage usually occurs within a single exchange, using three different currency pairs for arbitrage. For example, in a certain exchange, you can use BTC/ETH, ETH/USDT, and BTC/USDT to perform triangular arbitrage. By taking advantage of the exchange rate differences between the currency pairs, you can earn profits without going through fiat currencies.
Example:
Assuming you have BTC, you can first exchange it for ETH through BTC/ETH, then exchange ETH for USDT through ETH/USDT, and finally exchange USDT back to BTC through USDT/BTC. If there is a price difference between the exchange rates, you can earn a portion of the profits.
5. Flash Arbitrage
Flash Arbitrage takes advantage of the price difference between decentralized exchanges (DEX) and traditional centralized exchanges. This type of arbitrage uses smart contracts to complete a series of operations within a block without the risks associated with transfer delays. Typically, flash arbitrage relies on Flash Loans to borrow funds, allowing you to execute arbitrage without needing to own all the capital yourself.
How it Works:
Use flash loans to borrow a large amount of funds from a protocol.
Engage in arbitrage trading using price differences between decentralized exchanges (like Uniswap or SushiSwap) or between different exchanges.
Complete all operations within a trading block and repay the flash loan. The remaining amount is your profit.
The advantage of this method is its speed and lower risk, but it typically requires high technical implementation.
Challenges and Risks of Arbitrage
Although arbitrage can bring considerable profits, it also faces certain challenges and risks:
Transaction Fees: Cross-platform transfers and trading fees can be high, affecting profits.
Transfer Speed: Cryptocurrency transfers sometimes take a long time, especially during network congestion, and price fluctuations might cause you to miss arbitrage opportunities.
Market Volatility: The cryptocurrency market is very volatile, and rapid price changes can cause arbitrage opportunities to disappear within a short time.
Liquidity Issues: Some trading pairs may lack sufficient liquidity, making it difficult for you to complete trades at expected prices.
Regulatory Risks: Regulatory policies in some countries may restrict cross-platform arbitrage, especially when arbitraging between some decentralized exchanges and platforms, which requires caution.
