Is Stablecoin Arbitrage Risk-Free?
No, stablecoin arbitrage is not risk-free. The primary risk is the speed of execution and the possibility of a sudden market shift (slippage risk).
For algorithmic stablecoins, the risk is that the volatile governance token crashes during the arbitrage process, resulting in a net loss instead of the expected profit. Furthermore, smart contract risk and gas fee volatility pose additional risks.
Glossar
Stablecoin Arbitrage
Exploitation ⎊ Stablecoin Arbitrage involves capitalizing on minor, temporary price discrepancies between a stablecoin’s market price and its intended one-dollar peg across different exchanges or DeFi protocols.
Smart Contract Risk
Vulnerability ⎊ Smart contract risk, within cryptocurrency and derivatives, stems fundamentally from inherent code flaws and systemic dependencies.
Governance Token Crashes
Contagion ⎊ Governance token crashes frequently manifest as systemic risk events within decentralized finance (DeFi) ecosystems, propagating through interconnected protocols via liquidity pools and collateralized debt positions.
Gas Fee Volatility
Instability ⎊ This refers to the unpredictable fluctuation in the transaction fees required to execute operations on underlying blockchains, which directly impacts the operational cost and efficiency of on-chain derivative settlements and margin transfers.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.