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Stablecoin Arbitrage Strategies

Recently, we announced the launch of our stablecoin relayer ForDeX. The goal behind building a  relayer is to serve the rapidly growing crypto community by providing a platform to trade in a peer-to-peer trustless manner, where users always have access to their private keys. This is especially true in a scenario where centralized exchanges are getting hacked on an almost-daily basis.

The increasingly growing number of stablecoin projects and the price guarantee that stablecoins are expected to provide is creating multiple kinds of price arbitrage opportunities. For beginners, price arbitrage refers to price inconsistencies for the same asset on different exchanges. For example, Bitcoin’s price on Coinbase and Gemini are not always exactly the same; there is usually a small price difference between the two exchanges. A trader can profit by buying BTC on an exchange trading at a lower price and selling it on a different exchange trading at a higher price. Most arbitrage trades are zero-risk trades as the buying and selling almost happens simultaneously, or over a very short period, leaving the trader immune to price movements. In traditional asset classes, most of the price arbitrage is exploited by quants and HFT traders who deploy sophisticated, lightning speed trading strategies to capture the price arbitrage spread. However, with a relatively less number of quantitative traders in the fledgling crypto trading ecosystem, these price arbitrages are significant in some cases.Stablecoin-to-stablecoin trading is relatively new to the crypto world and only a handful of centralized exchanges, besides ForDeX, offer stablecoin to stablecoin trading pairs, resulting in exciting trading opportunities for arbitrageurs. Let’s take a look at a couple of such sample strategies below.

USDC/PAX on Binance and PAX/USDC on ForDeX

USDC/PAX price on Binance – 1.00

PAX/USDC price on ForDeX – 1.00092  

Arbitrage trade flow:

a) Buy 1 USDC for 1 PAX on Binance

b) Move PAX from Binance to ForDeX

c) Buy 1.00092 PAX for 1 USDC on ForDeX

By the following the above path of trades, an arbitrageur started with 1PAX and ended up with 1.00092 PAX at the end of two trades, capturing a price spread of  0.09% with zero risk.

USDC/DAI on ForDeX and DAI/USDC on Coinbase Pro

DAI/USDC price on Coinbase Pro – 0.98

USDC/DAI price on ForDeX – 0.9998  

Arbitrage trade flow:

a) Buy 1.02 DAI for 1 USDC on Coinbase Pro

b) Move DAI from Coinbase Pro to ForDeX

c) Buy 1.02 USDC for 1.02 DAI on ForDeX

By the following the above path of trades, an arbitrageur started with 1 USDC and ended up with 1.02 USDC at the end of two trades, capturing a price spread of  2% with zero risk.

These are just a couple of examples of possible arbitrage. It is probably safe to assume that such arbitrage opportunities will disappear at scale, but for the near future, there is definitely profits to be made for the enterprising trader, in a fairly capital efficient manner.

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By Ramani Ramachandran and Rohit Alluri

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