How Does a Low-Fee Pool Attract More Arbitrage Volume?
Arbitrageurs are seeking risk-free profit, which is calculated as the price difference minus all costs, including the pool's transaction fee. A lower fee tier reduces the cost component, lowering the profitability threshold for an arbitrage trade.
This means smaller price imbalances become profitable, leading to more frequent arbitrage activity and thus higher overall trading volume in the low-fee pool.
Glossar
Trading Volume
Liquidity ⎊ ⎊ Trading volume represents the total quantity of an asset ⎊ cryptocurrency, options contracts, or financial derivatives ⎊ bought and sold within a given timeframe, typically expressed in units or notional value.
Profitability Threshold
Level ⎊ Profitability Threshold is the minimum return level, often defined by the initial premium collected minus transaction costs, that a derivative position must exceed to be considered successful.
Governance Vote
Decision ⎊ A governance vote represents the formal, on-chain decision-making process utilized by decentralized autonomous organizations (DAOs) that manage cryptocurrency protocols, including derivative platforms and liquidity pools.
Fee Structure
Allocation ⎊ Fee structures within cryptocurrency, options trading, and financial derivatives represent the systematic distribution of costs associated with executing and maintaining positions, impacting net profitability and strategic decision-making.
Arbitrage
Exploitation ⎊ Arbitrage, within cryptocurrency, options, and derivatives, represents the simultaneous purchase and sale of an asset in different markets to capitalize on transient price discrepancies, effectively a risk-free profit opportunity.