DeFiChain

<p>Arbitrage is a trading strategy that involves taking advantage of price differences in assets on different markets or exchanges. In the cryptocurrency market, this can happen when the price of a particular coin varies on different exchanges. For example, if Bitcoin is selling for $17,000 on one exchange and $17,200 on another, a trader can buy BTC on the first exchange for $17,000 and then sell it on the second exchange for $17,200, making a profit of $200.</p><p>But arbitrage opportunities extend far beyond simply leveraging price discrepancies on “blue chip” crypto assets. They also apply to the long tail of tokens, which includes synthetic instruments such as tokenized stocks and commodities. Tokenized stocks are digital assets that mimic the price action of publicly traded stocks, allowing cryptocurrency traders to gain exposure to traditional markets.</p><p>On DeFiChain’s bitcoin-based <a href="https://defichain.com/" rel="noopener noreferrer nofollow">DeFi platform</a>, traders are capitalizing on price discrepancies in dTokens to profit while simultaneously helping to balance market prices.</p><h3 id="the-arbitrage-game">The Arbitrage Game</h3><p>Traders can use arbitrage to profit from price discrepancies by simultaneously buying and selling tokenized assets on different exchanges. This requires a high level of market knowledge and the ability to move quickly to take advantage of the price differences before they disappear. It sometimes involves the use of automated trading software, which can monitor the market and execute trades faster than a human trader could.</p><p>On DeFiChain, dTokens are designed to give investors exposure to off-chain assets while incentivizing accurate pricing through arbitrage. The ‘d’ stands for decentralized and a dToken can represent any kind of asset, on- or off-chain, that’s recreated on DeFiChain’s DEX.</p><p>Commonly, they’re used to create synthetic stocks with the aid of pricing oracles that set the initial cost of the dToken. Because owning dTokens doesn’t give you possession of the underlying asset, or entitle you to any kind of dividends or payouts, these decentralized assets are not classified as securities.</p><p>The oracle price of the asset, however, which can be thought of as the reference price, will not always be in perfect sync with the market price of the corresponding dToken. This is because supply and demand on the DeFiChain DEX will lead to the dToken price moving above or below the oracle price. </p><h3 id="future-swaps-tighten-arbitrage-opportunities">Future Swaps Tighten Arbitrage Opportunities</h3><p>The ability to profit from price discrepancies in dTokens is a feature, not a bug. Nevertheless, in an ideal world, the dToken would closely follow the price of the real world asset it’s mapped against. To facilitate this, DeFiChain has implemented a <a href="https://blog.defichain.com/defichains-future-swap-feature/" rel="noopener noreferrer nofollow">feature</a> known as future swaps.</p><p>This “determines the settlement price (i.e. the oracle price) on the block height where the futures contract is to be executed (roughly every 7 days).” If the price of the dToken deviates by more than 5% during that period, users will be better served by swapping instantly. Otherwise, they should hold and await the execution of the futures contract at the stated price.</p><p>Through a combination of future swaps and free market arbitrage, DeFiChain has settled on a system that generates a better deal for everyone. Buyers of synthetic stocks and other real world assets recreated on DeFiChain can be assured that the price they’re paying is close to the real market price of the asset. Arbitrageurs, meanwhile, can still generate profits from keeping the system in check when major mispricings occur.</p><h3 id="arbitrage-makes-everything-better">Arbitrage Makes Everything Better</h3><p>Ultimately, there are several reasons why arbitrage can be good for cryptocurrency markets. First, it can help to create more efficient markets by enabling traders to take advantage of price differences across different exchanges and capitalize on inefficiencies. This can help to reduce the spread between prices and lead to more accurate pricing overall.</p><p>Second, arbitrage can help to increase liquidity in the market by providing traders with opportunities to buy and sell cryptocurrencies quickly and easily. This can make it easier for investors to enter and exit positions, which can help to support the overall health of the market. Finally, arbitrage can help to reduce volatility in the market by enabling traders to quickly capitalize on price discrepancies and move capital between different cryptocurrencies. This can help to dampen the effects of price swings and reduce the overall risk for investors.</p><p>Arbitrage can be a profitable trading strategy in the cryptocurrency market, but it also comes with risks. Prices can change rapidly, so there is always the possibility that a trade could turn out to be unprofitable. In addition, there may be fees associated with making trades on multiple exchanges, which could cut into any potential profits. As with any trading strategy, it is important to carefully consider the potential risks and rewards before entering into any trades.</p><p>For sophisticated traders who know what they’re doing, arbitraging on decentralized exchanges can be a consistently profitable strategy. Thanks to dTokens, it’s one that DeFiChain traders are utilizing every day to good effect.</p>

DeFiChain Traders Leverage Arbitrage Opportunities to Profit From dAssets

Table of Contents

DeFiChain

Other articles published on Jan 3, 2023

AMA with Solar Core Lead Dev

BUIDL-Weekly: 21NOV22- 27NOV22

BUIDL-Weekly: 26DEC22 - 01JAN23

BUIDL-Weekly: 05DEC22- 11DEC22

Solana is described as a "Shitcoin" by Arthur Hayes

Solana Beats Ethereum, Polygon, & Others With Most Transactions

Join our free newsletter for daily crypto updates!