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Define Arbitrage and Its Role in Keeping AMM Prices Aligned with External Markets

Arbitrage is profiting from price differences across markets, which forces AMM pool ratios to reflect external prices.
Greeks.Live20.11.25

Define Arbitrage and Its Role in Keeping AMM Prices Aligned with External Markets.

Arbitrage is the simultaneous buying and selling of an asset in different markets to profit from a price difference. In AMMs, arbitrageurs monitor the pool's calculated price against external exchange prices.

If the AMM price is lower, they buy from the pool and sell externally, and vice versa. This activity adjusts the pool's token ratio until its calculated price matches the external market, ensuring price alignment and market efficiency.

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