Arbitrage

Arbitrage is a trading strategy that involves buying and selling the same asset across different exchanges to exploit price differences.

How Arbitrage Works

When a block contains multiple large transactions, it can create price imbalances across different exchanges. For instance, you might be able to buy 1 ETH for 2800 USDC on Uniswap and sell it for 3000 USDC on Sushiswap. This price imbalance is called an arbitrage opportunity.

Role of Arbitrage Bots

Arbitrage bots are designed to capitalize on these price discrepancies. They continuously monitor the market and, upon detecting a price difference, they swiftly execute trades to profit from the imbalance. These bots compete aggressively for the first slot in the next block to ensure they can execute their trades before the price discrepancy is resolved.

Example Scenario

• Uniswap: Buy 1 ETH for 2800 USDC.

• Sushiswap: Sell 1 ETH for 3000 USDC.

• Profit: The arbitrage bot makes a profit by buying ETH at a lower price on Uniswap and selling it at a higher price on Sushiswap.

Arbitrage plays a crucial role in maintaining market efficiency by equalizing prices across different platforms, ensuring that no significant discrepancies persist for long.