How Do Decentralized Exchanges (DEXs) Change the Dynamics of Crypto Arbitrage Compared to Centralized Exchanges (CEXs)?
DEXs introduce unique arbitrage dynamics due to their automated market maker (AMM) models, which determine prices algorithmically based on the ratio of assets in a liquidity pool. This can create arbitrage opportunities within a single DEX (e.g. between two different pools) or between a DEX and a CEX.
DEX arbitrage is permissionless but subject to on-chain risks like network congestion and high transaction fees, which can affect profitability. Unlike CEXs, there is no central order book, and trades are executed directly on the blockchain.
Glossar
Centralized Exchanges
Exchange ⎊ Centralized exchanges (CEXs) represent a critical infrastructure within cryptocurrency markets, facilitating order matching and settlement for a diverse range of digital assets, including options and derivatives.
Crypto Arbitrage
Mechanism ⎊ Crypto arbitrage, within the cryptocurrency ecosystem, represents the simultaneous purchase and sale of an asset across different markets to capitalize on transient price discrepancies, extending beyond spot markets to encompass derivatives exchanges and decentralized finance protocols.
Automated Market Maker
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange (DEX) design, moving away from traditional order book models to a constant function market mechanism.
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Arbitrage Dynamics
Mechanism ⎊ Arbitrage dynamics within cryptocurrency, options, and derivatives markets represent the exploitation of temporary price discrepancies for risk-free profit, demanding rapid execution and precise modeling of interconnected markets.