Uncovering the Truth of "Arbitrage" in the Cryptocurrency Circle: From Theory, Strategies to Risks

Recently, there has been a lot of discussion about "arbitrage," from "risk-free annualized XXX%" funding rates to DeFi mining arbitrage combinations, and even basic "brick moving"… It seems like there is gold everywhere, just bend down to pick it up? 🤔

Today, let's dig deeper into whether arbitrage is really as good as it sounds and how to approach it? 👇

First, based on KOL opinions, here’s a summary of common arbitrage strategy types:

• Spatial Arbitrage: Cross-exchange (brick moving)
• Temporal/Structural Arbitrage: Funding rates (spot and futures), basis
• Interest Rate Arbitrage: Stablecoins/lending/LP mining (DeFi/CeFi)
• Cross-Asset Arbitrage: Triangular arbitrage
• DeFi Ecosystem Arbitrage: Cross-chain, aggregators, flash loans, etc.
• Special Scenario Arbitrage: Prediction markets
• Model-Driven: Statistical arbitrage (quantitative)

Next, a summary of KOL arbitrage tweets:

1. Node Scientist (Ø,G) @monciciisgirl

"Arbitrage in the Crypto World: How to Find 'Free Lunches' in the Cryptocurrency Market? [Theoretical Edition]"

https://x.com/monciciisgirl/status/1913804319067172897

Provides a relatively comprehensive theoretical framework for cryptocurrency arbitrage, covering various mainstream strategies.

1. Cross-exchange arbitrage: Utilize price differences for the same cryptocurrency across different exchanges (CEX or DEX), buying low and selling high.
2. Triangular arbitrage: Within a single exchange, profit from pricing imbalances among three trading pairs (e.g., BTC/USDT, ETH/BTC, ETH/USDT) through continuous trading (A→B→C→A).
3. Spot-futures arbitrage: Profit from the basis (difference) between spot market prices and futures contract prices, typically by buying spot and selling futures, expecting prices to converge at expiration.
4. Funding rate arbitrage (perpetual contracts): Hold opposite positions in spot and perpetual contracts (e.g., buy spot + short perpetual contracts), primarily to earn the funding rate of the perpetual contract (when the rate is positive).
5. Flash loan arbitrage (DeFi): Utilize uncollateralized flash loans provided by DeFi protocols to complete a series of arbitrage operations (e.g., buying and selling across different DEXs) within a single transaction block and repay the loan.
6. Statistical arbitrage: Identify temporary deviations in price patterns or correlations based on statistical models and historical data, trading with the expectation of price reverting to the mean.

2. taresky @taresky

"Risk-Free Annualized 360%? Crypto Arbitrage Made Easy for Beginners"

https://x.com/taresky/status/1764615661324775821

Aimed at beginners, comparing exchange lending and funding rate arbitrage.

1. Exchange lending (wealth management): The most basic and suitable "arbitrage" method for beginners. Users deposit coins into the exchange, which the platform lends out to others while managing risks. Detailed comparisons of the characteristics and interest rate mechanisms of three models: Bitfinex (order book), OKX (dark pool bidding), Binance (dark pool matching).
2. Funding rate arbitrage: Hedge price risk by buying spot + shorting an equivalent amount of perpetual contracts to earn positive funding rates. Provides an estimated formula for APY: APY = (funding utilization rate) x (funding rate) x 3 (settlement frequency per day) x 365.

3. Jemima Conlon

"Cryptocurrency Arbitrage: A Complete Guide"

https://www.ledger.com/zh-hans/academy/%E5%8E%BB%E4%B8%AD%E5%BF%83%E5%8C%96%E9%87%91%E8%9E%8D/what-is-crypto-arbitrage-trading

A comprehensive overview and definition of cryptocurrency arbitrage trading, covering everything from basic cross-market price arbitrage to advanced flash loan arbitrage. It first explains the basic principles of arbitrage, then focuses on several typical arbitrage opportunities in the crypto space:

1. Cross-exchange arbitrage, including price differences between centralized exchanges (due to different pricing mechanisms, the same asset may have slightly different prices) and decentralized exchanges (due to AMM pricing and liquidity reasons, different DEX prices may temporarily differ).
2. Triangular arbitrage, which involves sequentially exchanging three tokens to profit from pricing discrepancies, explaining how to utilize the exchange rates among BTC/ETH, ETH/XTZ, and XTZ/BTC.
3. Flash loan arbitrage: Flash loans allow uncollateralized instant borrowing through smart contracts, enabling arbitrageurs to scale operations and complete complex arbitrage processes in a single on-chain transaction.

It also emphasizes the advantages of decentralized arbitrage over centralized arbitrage: lower costs and no need for trust in custodianship, as users always control their private keys when arbitraging between DEXs.

4. Arbitrage Old Six @taolige666

"Latest DeFi Arbitrage Strategies | How to Achieve Stable Annualized Returns Above 10%?"

https://x.com/taolige666/status/1914519861671419929?s=46\&t=AZPZW3PB-FJ_nfJ8aA7Lxg

In a bearish market where investors prefer safe-haven assets, DeFi players are more inclined to use stablecoins and delta-neutral products for wealth management. Several robust arbitrage ideas suitable for ordinary users: utilizing LSD combined with hedging to earn risk-free interest rate spreads, hedging volatility through decentralized perpetual contract platforms to earn fees, etc., with corresponding projects/pools recommended.

The core idea is to minimize exposure to price volatility risk (delta-neutral) while capturing yields provided by on-chain protocols, such as staking rewards or trading fees. This way, even during bearish market conditions, stable double-digit annual returns can be achieved.

5. Lin Wuxian SamLam @samsir1997

"Arbitrage Brick Moving, A Beginner's Guide"

https://x.com/samsir1997/status/1892247829999169893

The essence of arbitrage is summarized as "brick moving" by exploiting information asymmetry, which may be more helpful for those "with basic positions + financial capabilities." It includes the following arbitrage methods:

1. Interest Rate Arbitrage: Using traditional foreign exchange as an example, borrowing low-interest currencies (like yen), converting and investing in high-interest currency (like USD) assets to earn interest differentials.
2. USDT and Fiat Arbitrage: Specifically refers to exploiting price differences of USDT against fiat currencies (in this example, USD) across different exchanges (e.g., Bitfinex vs. Kraken).
3. Positive Swap Arbitrage: In the forex market, holding currency pairs that earn positive overnight interest (swap) positions, typically hedging exchange rate risk through reverse spot or other tools.
4. Cross-Market Arbitrage: Utilizing price differences of the same asset (e.g., USD/BRL forex pair) in different geographical markets (e.g., Brazilian market vs. U.S. market) for arbitrage.
5. Triangular Arbitrage: Within (usually the same) market, exploiting pricing deviations among three currencies (e.g., USD, EUR, GBP) through sequential exchanges to achieve appreciation.
6. Statistical Arbitrage: Based on historical data analysis, discovering price relationships (e.g., price ratios) between two or more correlated assets (e.g., USD/JPY and USD/EUR), and conducting reverse trades when relationships deviate from the mean, expecting to profit when they revert to the mean.

6. Aliez Ren @aliez_ren

"Diverse Perspectives on Arbitrage"

https://x.com/aliez_ren/status/1913505111139295309

Aliez Ren developed Taoli Tools | Arbitrage Tools, with the core purpose of providing a centralized information navigation and toolbox for users interested in or practicing arbitrage. Clearly categorized by arbitrage type, it mainly covers cross-exchange brick moving arbitrage, perpetual contract funding rate arbitrage, hedging, etc., and includes basic knowledge and tutorials. More details: https://renzholy.notion.site/Taoli-Tools-18c64b000c25808e862bd0c61b193eb1

⚠️ Biteye does not endorse or recommend arbitrage tools, for reference only, DYOR.

7. Brak @0xbrak

Sharing real players' views on current arbitrage yields and strategies

https://x.com/0xbrak/status/1890303808556920881

Discussed arbitrage strategies and mechanisms (including controversial ones):

1. Funding rate arbitrage: Cross-exchange hedging to earn rate differentials.
2. Spot-futures arbitrage: Profit from convergence of price differences between delivery date futures and spot (e.g., BN-0328-BTC futures vs. spot BTC).
3. Price differential arbitrage: Covers DEX/CEX price differentials, triangular arbitrage, flash loans, and other strategies utilizing direct price differences.
4. PT Arbitrage (Pendle): Trading Pendle's principal tokens (PT) to convert airdrop expectations into fixed income, requiring research on underlying assets and hedging non-USD PT risks.
5. JLP/HLP Arbitrage (Pendle): Holding Pendle liquidity certificates, hedging underlying asset risks, earning fees, airdrop rewards, etc. (noting that most people do not hedge).
6. YT Flow (Pendle): Buying Pendle yield tokens (YT) when the price has sufficient safety margins, speculating on future yields (e.g., early $ENA, $USDC mining).
7. Options Flow: Utilizing pricing distortions in the options market caused by sentiment and other factors to arbitrage through spreads, straddles, etc.
8. MEV/Scientist Flow: Extracting value on-chain through transaction ordering (e.g., sandwich attacks).

8. Pix @PixOnChain

"How I Made $100k Arbitraging Between Prediction Markets (Full Guide)"

https://x.com/PixOnChain/status/1914377412126638095

The core strategy shared is prediction market arbitrage, which profits from the inefficiency of different platforms offering different pricing (odds) for the same event outcome, rather than gambling.

The key methodology is:

1. First, search for the same event across multiple prediction markets, especially focusing on markets with many possible outcomes.
2. Identify the lowest purchase prices for all possible outcomes of that event across platforms and sum them up; if the total cost is less than $1 (or 100%), there is an arbitrage opportunity. Execution must be extremely quick, as price differences can vanish in an instant ("delay game"), and it is recommended to use automated tools to buy the lowest-priced shares of all outcomes on the respective platforms to lock in profits.

Tend to choose opportunities with high expected annualized yields (APY) (e.g., >60%), and not necessarily hold until expiration; if the market selling price of the combined shares held is higher than the cost, consider exiting early to improve capital efficiency.