What's arbitrage on Solana
The Arbitrage traders are not just opportunists seeking profit. They are essential players who ensure market stability and efficiency within the blockchain ecosystem.
⌜HISTORY OF ARBITRAGE⌝
The 17th century marked a significant shift in the world of arbitrage, Amsterdam emerging as the global financial hub.
The Dutch East India Company became the first publicly traded company in the world, with shares being traded in major cities like Amsterdam, London, and Paris.
The Bank of Amsterdam (1609) created a more stable currency system but traders still found ways to profit from foreign exchange (forex arbitrage).
They Spices, gold, and tulips were traded between continents, creating huge arbitrage opportunities.
⌜DEFINE ARBITRAGE⌝
Arbitrage is a trading strategy where you make a profit by buying an asset at a lower price in one place and selling it at a higher price in another place. The difference between these two prices is your profit.
Example of Simple Arbitrage:
Let’s say you go to two different stores:
→ Buy an apple for $3 on Shop A
→ Sell this apple for $5 on Shop B
If you do this you can win $2 by apple⌜HOW ARBITRAGE WORKS IN CRYPTO⌝
In cryptocurrency, prices of the same coin or token can vary between different exchanges (financial markets). This creates an opportunity to buy low on one platform and sell high on another.
Example in Crypto Arbitrage:
→ 1 SOL costs $150 on Exchange A
→ 1 SOL costs $151 on Exchange B
Buy Solana on Exchange A and sell it on Exchange B, making a $1 profit per SOL.⌜Why Does Arbitrage Exist?⌝
Arbitrage plays a crucial role in the blockchain ecosystem by balancing prices across different networks and trading platforms. Arbitrage traders help correct price discrepancies between exchanges, ensuring market stability.
These traders take advantage of price differences by buying an actif at a lower price on one platform and selling it at its actual market value elsewhere. This process helps realign prices and keeps DeFi protocols and trading platforms in sync with the broader market. Without arbitrage, price imbalances could last longer, leading to inefficiencies and potential losses for users.
⌜TYPES OF ARBITRAGE IN CRYPTO⌝
1️⃣ Centralized exchange
– Buying from one exchange and selling on another (CEX)
→ Binance → Kraken
2️⃣ Decentralized exchange (Atomic arbitrage)
– Finding price differences between decentralized exchanges (DEX)
→ Uniswap, Meteora, Raydium, Orca ...It’s theoretically risk-free since everything happens in a single transaction, but it requires a bot and ultra-fast execution!
3️⃣ Multidirectional Arbitrage
Exploiting price differences between different trading pairs on the différents exchange (CEX & DEX).
Involves a single asset traded across multiple platforms to exploit price variations.
→ Buy SOL on a DEX like 150$ -> and sell it immediately
→ Sell SOL on CEX like 152$⌜Transaction Analysis⌝
This transaction is quite interesting! ⏩️ Here’s what happened ⏪️:
DEX Swaps Only – The transaction was executed across three liquidity pools: Raydium CLMM 🔁 Meteora DLMM 🔁 Raydium CP.
1️⃣ Starting Balance - The wallet began with 11.1 SOL and swapped it for 2,231 USDC.
2️⃣ USDC to LIBRA – The 2,231 USDC was then used to purchase 1,795 LIBRA.
3️⃣ Final Swap – The 1,795 LIBRA was exchanged for a massive 3,044 SOL!
📉 ‼️ High Fees Alert ‼️– This transaction incurred 0.48 SOL ($92,19) in fees, which is quite high for Solana blockchain.
Overall, this was a well-executed arbitrage move,
turning 11.1 SOL into 3,044 SOL through strategic swaps!
⌜ ⚠️ Risks of Arbitrage ⚠️⌝
- Fees – Trading, withdrawal, and deposit fees can eat up profits.
- Network Delays – Moving funds between exchanges can take time, and prices may change.
- Slippage – Crucial feature on Solana that safeguards traders against sudden price changes. It plays a key role in DeFi swaps and arbitrage by helping to mitigate the risk of losing funds from large price disparities.
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