Gerrit van Sittert | June 29 2022
Gerrit van Sittert | June 29 2022
Orion Protocol: new opportunities for arbitrage
Orion Protocol has unlocked new opportunities for arbitrage trading in crypto. In the past, arbitrage was only possible across multiple interfaces and accounts. The time spent switching between siloed markets meant increased risk of losing out on time-sensitive prices. Nowadays, automated trading systems (bots) perform lightning-fast transactions that quickly capitalize on lucrative arbitrage. That’s why the savvy arbitrage trader needs to be quick to adapt to emerging opportunities.
Orion is changing the arbitrage game by merging access across multiple siloed markets. Instead of transferring between different interfaces and accounts, Orion’s advanced liquidity aggregator integrates prices across multiple major CEXs, DEXs, and swap pools into one deep order book. The result is the best prices for digital assets gathered together on a single interface across multiple chains. This has planted the seeds for arbitrage opportunities never seen before in crypto thanks to Orion’s flagship solution, Orion Terminal.
What is arbitrage?
Arbitration (arbitrage) is a strategy that exploits price differences for identical products from one market to another. For example, someone may notice grapes on sale for $5 per pound in market A, but $6 per pound in market B. This person can exploit an arbitrage opportunity by buying grapes in market A, and earning $1 per pound by selling them in market B. Price variations across markets occur due to what is known as “imperfect information.” Imperfect information refers to the inherent non-ubiquitous access to up-to-date market information across participants. This is a fundamental concept in business. Prolific businessman, Aristotle Onassis, once said, “the secret to business is to know something that nobody else does.” Arbitrage is often referred to as “riskless profit” given that no price speculation is involved.
Arbitrage plays an important role in any market. Lower prices for the same products in one market translate into lower demand and increased supply in a competing market, which is then forced to lower their prices to remain competitive. By exploiting price discrepancies, arbitrage acts as a market force that corrects supply and demand imbalances. Arbitrage is no less important on Orion. As new pools of liquidity emerge from Orion’s advanced liquidity aggregation technology, price discrepancies are bound to occur and require rebalancing.
How Orion creates arbitrage opportunities
Orion is changing the way the crypto market organizes price information. This is because Orion’s ground-breaking technology aggregates prices from across the market to compete against one another. The most competitive prices in crypto are thereby created along with the emergence of entirely new pools of liquidity that service unique trading pairs and DeFi possibilities.
As liquidity from new exchanges tap into Orion, their assets are opened up to unique pairs that were never possible before. Orion’s cross-chain trading functionality further enhances the ability for pools of liquidity to form around these new pairs. Arbitrage traders can anticipate inconsistent pricing across these new and existing pools, and exploit them accordingly. These are opportunities that could never have been possible before Orion.
Examples of arbitrage across CEXs and DEXs on Orion
One example of how Orion users can capitalize on arbitrage opportunities is by finding pairs trading on a negative spread. A spread refers to the price difference between the bid and ask price on an asset. Ask prices are those that sellers are willing to sell at, and bid prices are those that buyers are willing to buy at. Typically, there will be a positive spread because the lowest ask price in a market tends to be higher than the highest bid price. However, buyers can be motivated to maintain a bid that is higher than the asking price, which presents an opportunity to buy cheap, and sell high.
Users can also find arbitrage opportunities by seeking price discrepancies across similar trading pairs. For example, the price of ETH on one trading pair (ie. ETH/ADA) may be advantageous against the price of ETH on another pair (ie. ETH/USDT). In this case, users can buy ETH on one pair for less than they sell on the other.
Risks of arbitrage trading
We will consider three important factors that can impact a user’s arbitrage profitability. These are the fees on making trades, the volume of a market, and the slippage between expected and realized prices.
Arbitrage traders often make profit on small margins, and not paying attention to fees can make the difference between trading profitably or not. Users on Orion Terminal can ensure they trade with the lowest fees by paying with Orion’s native token, ORN.
The volume of a market will play a role in whether a user’s trades will execute in a timely fashion. Low-volume markets often present lucrative prices for arbitrage, but insufficient liquidity for finalizing trades quickly enough to capitalize on time-sensitive opportunities.
Slippage occurs when trades are executed at a price that is different from the quoted price. This typically occurs when the market is highly volatile or also during periods of low-liquidity. Again, since arbitrage is often conducted on small margins, it is important for users to ensure their trades are being executed within a profitable price range. This can be done by always placing limit, or stop-loss orders when making trades.
Create trading bots with Orion’s SDK
As mentioned above, trading bots are common practice for implementing lightning-fast trades on arbitrage opportunities. This is one reason why Orion provides the Software Development Kit (SDK). With the Orion SDK third parties can implement their own DeFi solutions on top of the most advanced liquidity aggregator ever developed.
The Orion SDK is the framework upon which all DeFi solutions on Orion are built. Now anyone can utilize this open-source repository to build their own powerful financial tools. From arbitrage trading bots to DEXs, the Orion SDK is the toolkit for building on Orion - the gateway to the deepest liquidity in crypto.
Orion Protocol’s aggregation of CEXs, DEXs, and swap pools is marking the first time that liquidity across the whole market can be accessed in one place. The ripple effect of this leap is birthing new markets that present new opportunities for arbitrage trading, and limitless DeFi possibilities.