Synthetix Perps Price Impact Arbitrage

Following our anterior station connected backing complaint arbitrage successful Synthetix Perps, the adjacent imaginable strategy presents itself: Price Impact Arbitrage. This attack focuses connected capitalizing the premium oregon discount introduced by the terms interaction function.

Introduction

Following our anterior station connected backing complaint arbitrage successful Synthetix Perps, the adjacent imaginable strategy presents itself: Price Impact Arbitrage. This attack focuses connected capitalizing the premium oregon discount introduced by the price interaction function wrong Synthetix Perps markets during impermanent marketplace imbalance.

Understanding Price Impact successful Synthetix Perps

As explained successful our erstwhile posts, Synthetix Perps has crafted an motor wherever liquidity providers' delta neutrality is maintained done mechanisms similar Dynamic Funding Rates & the Price Impact function. The terms interaction relation adjusts the execution terms of trades based connected marketplace skew and commercialized size, creating opportunities for arbitrage against the outer marketplace terms (aka the oracle price) erstwhile the marketplace leans successful 1 direction.

Delta Neutrality and Market Balance

A halfway extremity of the Synthetix Perps strategy is to support delta neutrality, wherever the marketplace is balanced, and nary azygous broadside (long oregon short) persistently dominates. This equilibrium is captious for the market's show and liquidity providers' fiscal health. When the marketplace is agelong oregon short-skewed, the Price Impact relation generates a premium (or discount) for taking the little skewed side, frankincense incentivizing traders to bring the marketplace backmost to equilibrium.

The Price Impact Function astatine Work

Imagine the ETH perp marketplace has a agelong skew connected ETH (meaning it has much longs than shorts). A trader identifying this could participate a abbreviated position, receiving a premium connected their execution terms owed to the existing skew. This means that a trader is capable to abbreviated ETH astatine a higher than Oracle terms value. The grade of interaction connected the terms depends connected the archetypal and last skew earlier and aft the trade. This dynamic ensures that traders are encouraged to instrumentality positions that pb to a balanced market.

The Arbitrage Strategy: Exploiting Price Deviations

Arbitrageurs tin exploit the terms discrepancies caused by marketplace imbalances.

For instance, if Synthetix Perps is showing a important agelong skew connected ETH and different level has a much balanced skew, determination lies an opportunity:

1. Short connected Synthetix Perps: Enter a abbreviated presumption connected ETH astatine a premium terms owed to the agelong skew.
2. Long connected Another Platform: Simultaneously, instrumentality a agelong presumption connected ETH connected a antithetic level wherever the terms is person to the oracle price.
3. Market Rebalance: As different traders announcement the imbalance connected Synthetix, they, too, whitethorn instrumentality abbreviated positions, correcting the skew.
4. Exit and Profit: The arbitrageur tin past adjacent some positions erstwhile the discrepancy betwixt Synthetix Perps and the different platform's prices diminishes oregon reverses, ideally astatine a profit.

An Example Calculation:

Trade Parameters:

• Arbitrage Trade Size: $10,000
• Premium connected Synthetix Perps owed to Long Skew: 0.5%
• Price connected Synthetix Perps: ETH astatine a 0.5% premium
• Price connected Another Platform: ETH astatine the Oracle price

Transaction Costs:

• Synthetix Perps Fees: Maker interest 0.02% (2bps), Taker interest 0.06% (6bps)
• Another Platform Fees: Flat interest 0.07% (7bps)

Trade Execution:

1. Opening the Trade:
   • The trader shorts ETH connected Synthetix Perps for $10,050 (due to the 0.5% premium).
   • Simultaneously, the trader takes a agelong presumption connected different level for $10,000.
2. Synthetix Perps Opening Fee arsenic Taker: $10,050 x 0.0006 = $6.03
3. Alternate Platform Opening Fee: $10,000 x 0.0007 = $7
4. Closing the Trade:
   • The marketplace skew is corrected, and the trader closes some positions astatine the Oracle price.
5. Synthetix Perps Closing Fee arsenic Taker: $10,000 x 0.0006 = $6
6. Alternate Platform Closing Fee: $10,000 x 0.0007 = $7

Total Fees for the Round-Trip Trade:

• Synthetix Perps Fees: $6.03 (opening) + $6 (closing) = $12.03
• Alternate Platform Fees: $7 (opening) + $7 (closing) = $14

Total Transaction Costs:

• Combined Fees: $12.03 (Synthetix Perps) + $14 (Alternate) = $26.03

Profit Calculation:

• Gross Profit: The trader entered the abbreviated presumption astatine a $50 premium ($10,050) and closed astatine the Oracle terms ($10,000), realizing a gross nett of $50.
• Net Profit: $50 (gross profit) - $22.03 (total fees) = $23.97

Conclusion:

After accounting for the fees connected some platforms, the nett net from this arbitrage commercialized would beryllium $27.97. This calculation assumes that each trades were executed astatine the desired prices without immoderate further slippage oregon changes successful marketplace conditions during the trade's execution. Traders indispensable relationship for each imaginable costs and risks erstwhile evaluating the profitability of arbitrage opportunities.

Risks and Considerations

This arbitrage strategy isn't without its challenges and risks, present are immoderate imaginable risks and considerations:

• Liquidity and Slippage: Liquidity connected some platforms indispensable beryllium capable to participate and exit positions without causing important slippage.
• Transaction & Trading: Factor successful trading fees & transaction fees to amended recognize the imaginable profitability of an arbitrage trade.
• Market Volatility: Sudden marketplace moves tin alteration the skew connected some markets to antithetic extents, starring to imaginable losses.

If you person immoderate questions oregon comments, delight sojourn the Synthetix Discord.