Glossary · A
Arbitrage
The practice of exploiting price differences for the same asset across different markets. In DeFi, arbitrage bots constantly scan DEXs for price discrepancies and execute trades to profit from the difference, simultaneously normalising prices across platforms.
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How Arbitrage works in practice
Arbitrage is what keeps prices consistent across venues. When an asset trades cheaper on one exchange than another, arbitrageurs buy low and sell high until the gap closes. In DeFi this is largely automated, and it is the mechanism by which AMM pools track the wider market: a pool that drifts off market price is simply a profit opportunity until someone corrects it.
Worked example
ETH trades at 3,000 USDC on a DEX and 3,020 on a centralised exchange. An arbitrageur buys on the DEX and sells on the CEX, capturing 20 USDC per ETH minus gas, fees and slippage. Their buying pushes the DEX price up until the remaining gap no longer covers costs.
Figures are illustrative and chosen to be checkable, not live market data.
The mistake that costs people money
Assuming the profit is the price difference. Gas, exchange fees, slippage, bridge time and the risk of the price moving mid-execution all come out of it. Most visible gaps are visible precisely because they are not profitable after costs.
Arbitrage: common questions
- What is Arbitrage?
- The practice of exploiting price differences for the same asset across different markets. In DeFi, arbitrage bots constantly scan DEXs for price discrepancies and execute trades to profit from the difference, simultaneously normalising prices across platforms.
- How does Arbitrage work in practice?
- Arbitrage is what keeps prices consistent across venues. When an asset trades cheaper on one exchange than another, arbitrageurs buy low and sell high until the gap closes. In DeFi this is largely automated, and it is the mechanism by which AMM pools track the wider market: a pool that drifts off market price is simply a profit opportunity until someone corrects it.
- Can you give an example of Arbitrage?
- ETH trades at 3,000 USDC on a DEX and 3,020 on a centralised exchange. An arbitrageur buys on the DEX and sells on the CEX, capturing 20 USDC per ETH minus gas, fees and slippage. Their buying pushes the DEX price up until the remaining gap no longer covers costs.
- What do people get wrong about Arbitrage?
- Assuming the profit is the price difference. Gas, exchange fees, slippage, bridge time and the risk of the price moving mid-execution all come out of it. Most visible gaps are visible precisely because they are not profitable after costs.