What Is Slippage and How Does It Affect Arbitrage Profitability?
Slippage is the difference between the expected price of a trade and the price at which the trade is executed. High slippage, often due to low liquidity or a large trade size, reduces the profit margin for arbitrageurs.
If the potential profit from arbitrage is less than the combined cost of slippage and gas fees, the arbitrage incentive disappears, and the peg-restoration mechanism stalls.
Glossar
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.
Profit Margin
Yield ⎊ Profit margin within cryptocurrency, options, and derivatives contexts represents the net profit realized as a percentage of the invested capital, factoring in transaction costs and risk-adjusted returns.
Concentrated Liquidity Pools
Allocation ⎊ Concentrated Liquidity Pools represent a capital deployment strategy within automated market makers, shifting from uniform distribution to customized ranges, thereby enhancing capital efficiency.
Sandwich Attack
Attack ⎊ Sandwich Attack is a specific form of front running where an attacker executes a buy order immediately before a victim's large intended buy order and then executes a sell order immediately after, effectively sandwiching the victim's transaction between two profitable trades for the attacker.
Low Liquidity
Impedance ⎊ Low liquidity within cryptocurrency, options, and derivatives markets signifies a diminished capacity of market participants to execute substantial trade volumes without causing significant price impact.
Arbitrage Incentive
Mechanism ⎊ Arbitrage incentive, within cryptocurrency, options, and derivatives, represents the profit potential arising from temporary price discrepancies across different markets or exchanges for the same asset or equivalent derivative contract.