Arbitrage is to buy a currency at one exchange and sell it more expensive at another exchange. For example, buy 1 DFI for $2 at DEX and sell it at Kucoin for $2,50. This generates you a profit of 50 cents per Coin. Your aim is to end with the same currency as you started but more.
This is what we call a “full cycle arbitrage”. Going through a whole arbitrage cycle is not always possible, but there are ways to work around this problem. In the following, we will explain how you can make different arbitrage deals and how our software can help you with this.
We have developed a dashboard where we show you the prices of the different trading pairs across all exchanges every minute. Furthermore, all prices are converted into dollars to make the comparison easier for you.
Before you start, we highly recommend you watch our Arbitrage Video.
You can find here: Arbitrage Dashboard
In addition, we have developed an arbitrage notification bot. We use a telegram alert system that generates an alert message when the ratio of best buy price and best sell price exceed a certain threshold.
Note: In the following we will shorten decentral exchange with DEX and central exchange with CEX.
Let’s remember again that our goal is to have the same currency in the end as we did in the beginning, only more of it. There are two different approaches to how you can do arbitrage, each with its pros and cons.
Version 1: Arbitrage with Withdrawal
As the name suggests, we try to arbitrage with it by buying DFI cheap on one exchange, sending it to the other exchange to sell it more expensive again.
Version 2: „Planned Cross Chain Arbitrage”
If we want to send coins from one exchange to another, it can take a long time. The goal of a “Planned Cross Chain Arbitrage” is not to send coins from one exchange to the other. This can only work if we plan possible arbitrage trades in advance.
First, we will look at Version 1: “Arbitrage with withdrawal”.
There are three different ways to make an arbitrage deal with withdrawal:
Buy DFI on CEX — Sell DFI on DEX — Withdraw to CEX — Trade End to Start Currency on CEX
Buy DFI on DEX — Sell DFI on DEX — Trade End to Start Currency on CEX
Buy DFI on DEX — Withdraw to CEX — Sell DFI on CEX — Trade End to Start Currency on CEX
We will discuss all three ways:
Path 1: BUY on CEX — Sell on DEX
Let’s start with an example:
Note: All examples are illustrated with a volume of 1000 DFI.
We differ between the Buy DFI Pair and the Sell DFI Pair. In the respective box you can see the trading pair, the exchange, and the average price per DFI.
a) BUY DFI Pair
The buy pair was USDT-DFI. This means that at that time we were able to buy DFI with USDT on Kucoin at an average price of 1 DFI = 3.37 $.
b) SELL DFI Pair
The sell pair was BTC-DFI. This means that at that time we were able to sell DFI on the DEX to get dBTC at an average price of 1 DFI = 3.55 $
In order to get USDT again, you have to take a number of non-recommendable steps.
Problem:
The problem here is that as soon as coins are on the DEX, they are on the Defichain blockchain and are therefore only images of the original crypto currency, so-called dTokens. So, for example, dBTC is a DeFi Standard Token (DST) on the DeFiChain Blockchain that represents a Bitcoin. That token is a wrapped Bitcoin on the DeFiChain.
These dTokens have the same value as the original cryptocurrencies, but cannot be easily transferred from the Defichain to other blockchains.
To solve this problem, Cake acts as a central bank. By sending your dToken from Defichain to Cake, Cake offers you to transfer them to their respective original blockchains.
This means that if you want to transfer dBTC to Kucoin, for example, you always have to do it via Cake and never directly. I.e. dBTC to Cake and from there BTC to Kucoin.
Why can this prevent us from going through a whole arbitrage circle?
The problem is that the withdrawal times of cake can be very long. If you handle amounts > $10000, it can take up to 72 hours.
This prevents us from going through a full arbitrage circle, as no arbitrage window is open 72h. We illustrate this with our example mentioned at the beginning:
We start with 3370 USDT on Kucoin and use it to buy DFI at the price of $3.37 per DFI and thus get 1000 DFI. We then send the 1000 DFI to the DEX, which takes about 3 to 15 minutes. On the DEX we trade the 1000 DFI for dBTC and get $3350 worth of dBTC.
As you can see, to close the circle, we would now have to send our dBTC first to Cake and then from Cake to Kucoin, which can take up to 72h. As a result, we have no way to go through a full arbitrage cycle to end up owning USDT again.
Conclusion:
With this way it is hardly possible to go through a full arbitrage circle. We can therefore not recommend this way, unless you are satisfied with owning BTC instead of USDT in the end
Path 2: BUY on DEX — Sell on DEX
Path 2 is exposed to the same Problem as Path 1. Because we trade on the DEX only, we would have to pay out our coins via cake again for a full circle, which simply takes too long.
But we will go into more detail about the DEX only variant later.
Conclusion:
We cannot recommend Path 2 (See Path 1).
Path 3: Buy on DEX — Sell on CEX
Let’s start with an example:
We start with $2550 worth of dETH on the DEX and buy 1000 DFI at a price of 1 DFI = $2.55. Next, we send the 1000 DFI to Kucoin, which takes about 5–15 minutes. On Kucoin we then sell our DFI at a price of 1 DFI = $2.61 and get $2610 worth of BTC. If we want to own ETH again in the end, we can exchange our BTC for ETH on Kucoin.
Conclusion:
Path 3 is a practical arbitrage option. Because we can send DFI directly to Kucoin without taking a detour via Cake, we are not exposed to such long withdrawal times.
In summary, if you want to arbitrage with withdrawal, you can only by taking Path 3, unless you are satisfied with having a different currency in the end than at the beginning.
Disadvantages:
Costs — You must pay additional withdrawal costs for transfer your coins to Kucoin
Risk — In the time you transfer the money from the DEX to Kucoin the price can change at Kucoin so that you do a smaller or even no arbitrage because somebody else was faster.
Advantages:
Full Cycle — You can do a full arbitrage cycle with this and thus end with the same currency with which you started
Nevertheless, there is a way to make successful arbitrage without withdrawal
This leads us directly to the second approach.
We will now try to circumvent the problem of long withdrawal times by — simply saying -neither sending coins to CAKE nor withdrawing from CAKE.
How does this work?
As in 3.1 “Arbitrage with Withdrawal” there are again 3 possibilities:
We describe the problem and the solution using the example of Path 2
Path 2: BUY DFI on DEX -> SELL DFI on DEX -> Trade End to Start Currency on CEX
We call this path “No Brainer Arbitrage”
So called “No Brainer “Arbitrage is an arbitrage opportunity that occurs at the same Exchange. The advantage is that you don’t have to transfer your coins from one exchange to another.
We illustrate the whole thing again with an example:
We start with 2500 dUSDT on the DEX and sell it at a price of $2.50 per DFI and thus get 1000 DFI. We now sell at a price of $2.62 per DFI and end up receiving $2620 worth of dETH.
We are facing two problems. Firstly, there is no dETH-dUSDT pool on the DEX and secondly, we are again exposed to the long withdrawal times of Cake.
We now solve these two problems with a detour. It is not necessary to send our dETH to a CEX now. Instead, since we are forward-looking arbitrage traders, we already own ETH on any CEX and now sell it to get 2500 USDT again. With the subtle difference that we now have $120 worth of Ethereum more than before.
Why does this diversion make sense?
Don’t look at your different coins per exchange, but as a total portfolio spread over all your exchanges.
If you do an only DEX arbitrage trade and sell dUSDT for DFI and come out with dETH at the end, so you have an imbalance to ETH, then go to your CEX and sell ETH for USDT to end up with just as many USDT as before. With the subtle difference that you now have more ETH.
Now one can say it’s a problem when I end up with a coin, I don’t want to own at all through an arbitrage deal. Let’s assume it’s DOGE. Yes, then just don’t make that trade, which is no problem at all.
We have found that the best sell pairs on DEX with an arbitrage >= 3% are BTC, ETH and USDC anyway. This means that it often happens, that we can make a DEX only Arbitrage Deal with these coins. And as a smart diversifying investor, you should have some of each of the mentioned coins at any time anyway.
This is not the optimal way, but it is the possible way.
The big advantage of the “planned no brainer arbitrage” is that we bypass any withdrawal fees and withdrawal times. Furthermore, through our data analysis we have found that 47% of all arbitrage opportunities >= 3% are DEX only arbitrage opportunities. It is therefore important to identify and take advantage of these arbitrage deals at an early stage.
What’s with the other paths?
For the other paths, the whole thing works similarly.
As soon as you would have to withdraw your coins to close your arbitrage circle, we instead make an “external” trade on a CEX to compensate our imbalance.
Of course, this way has its advantages and disadvantages.
Disadvantages
· Opportunity Costs
· This halves your return on investment (ROI)
To make a planned cross exchange arbitrage, you need to hold at least the most common pairs like BTC, ETH and USDT. However, it may be that you would much rather invest in other coins than these. In this way, you passively pay so-called “opportunity costs”, because you may have better coins in mind to hold, which bring you more returns.
On the other hand, if you make another CEX trade at the end to own the same currency as at the beginning, you must own the same volume of coins on a CEX. This means that your investment in such an arbitrage deal double, which mathematically halves your Return on Investment (ROI). This means that if you make a profit of 4.54 % on the DEX with your volume of 1000 DFI, as in the example above, this is halved overall because of your additional trade on the CEX.
Advantages
· No withdrawal costs
· Extremely fast
Of course, if you don’t pay anything out, you’ll save yourself the cost.
Furthermore, you have the most important factor for a successful arbitrage trade on your side:
We distinguish between time that you can influence and time that you cannot influence. A planned arbitrage trade reduces the time you can influence to a minimum. So, you just must wait until your 3 trades are executed on the blockchain and can enjoy your profits.
Our focus is clearly on simplifying the planned cross chain arbitrage even further. There are two ideas on how we would like to help you with this in the future.
Display End to Start Currency Price
As described above, for a successful “planned cross chain” arbitrage trade it is necessary that we transfer our end coin to our start coin. To make this easier for you, we will display the exchange rate between these coins on the most common central exchanges for every possible arbitrage trade in the future.
Personalized „No Brainer“ Arbitrage Telegram Bot
Due to long withdrawal times, we have decided to focus more on no-brainer arbitrage. Therefore, we will develop a “Personalized DEX only Arbitrage Bot” to give the community faster response times.
How does this work?
You will fill out a form where you can enter your buy currency and a deviation level between 3 and 10% at which you would like to be informed.
Let’s say you have some USDT on DEX. Therefore, you would like to be informed when a no-brainer arbitrage opportunity with USDT as a buy currency is possible. Let’s further assume that an arbitrage opportunity bigger than 5% with Buy Pair USDT-DFI and Sell Pair BTC-USDT occurs. The No Brainer Telegram Bot will send you instantly a message about this opportunity. You can now sell your USDT for DFI and buy BTC with it to experience instant arbitrage.