What Role Do Slippage and Transaction Fees Play in Mitigating Arbitrage Activity?
Slippage and transaction fees act as a friction cost for arbitrageurs. Slippage is the difference between the expected and executed price, which increases with trade size.
Transaction fees are paid to the network and LPs. If the potential profit from arbitrage is less than the combined cost of slippage and transaction fees, the trade becomes unprofitable, and the price imbalance persists longer.
Glossar
Swap Fees
Derivatives ⎊ In cryptocurrency and financial markets, swap fees represent periodic charges levied on counterparties engaged in derivative contracts, particularly perpetual swaps and options.
Friction Cost
Cost ⎊ Friction cost refers to the aggregate expenses incurred during the execution of a financial transaction, extending beyond the explicit price of an asset.
Price Imbalance
Discrepancy ⎊ Price imbalance, within cryptocurrency derivatives, signifies a temporary deviation from statistically expected order flow, often manifesting as an unusually large cluster of buy or sell orders at a specific price level.
Transaction Fees
Fee ⎊ Transaction fees, inherent in cryptocurrency, options, and derivatives markets, represent the cost of executing trades and utilizing network infrastructure.
Gas Fees
Mechanism ⎊ Gas fees represent the computational cost required to execute transactions on a blockchain network, functioning as a deterrent against denial-of-service attacks and incentivizing miners or validators to process transactions.