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Arbitrageurs
Balancing pools to exploit price deltas between markets.
Prices on MAYAChain are maintained by profit-seeking Arbitrageurs. Arbitrageurs find assets that are mispriced between markets. They buy assets on markets with low prices and sell them on markets with high prices. This earns them a profit.
Arbitrageurs compare the exchange rates on MAYAChain with the rates on external markets. If they find the price is lower on MAYAChain they can buy there and sell on an external market. If they find the price is lower on external markets they can buy there and sell on MAYAChain. This process is repeated at high-frequency. Over time, price information propagates and MAYAChain settles with external markets.
This is how MAYAChain avoids the need for oracles and how prices are set.
A swap takes place in the ETH/CACAO pool. This leaves the pool unbalanced. The ratio on MAYAChain is 20:1 ETH:CACAO, but is 16:1 on external markets. This means that CACAO is undervalued on MAYAChain.
Arbitrageurs can now buy cheap CACAO on MAYAChain and sell it for a profit on external markets. To do so, they swap ETH into the pool and get CACAO out. They sell this CACAO on external markets and make a profit.
The economics of the swap formula mean that Arbitrageurs should aim to restore balance to the pool in a single trade. Rebalancing should be done incrementally. If larger rebalancing trades are attempted, arbitrage may not be profitable.
Specifically, each rebalancing trade should be 40–50% the imbalance size. So if the imbalance starts at $100 in value, the first rebalancing trade should be between $40–50. This will leave the imbalance at $50–60. The next rebalance should be $25–30. This process repeats until a satisfactory balance is restored.
This hierarchical cascade of rebalancing trades will create arbitrage opportunities for Arbitrageurs big and small.
Trading profits are impacted by liquidity on MAYAChain and on external markets. As an example, if the price of the asset in a MAYAChain pool is $1.20, but the same asset on an external market is $1.00, then someone can buy off that external market and sell into the MAYAChain pool for profit.
If both markets are infinitely deep, then the following will occur:
- Buy on External Market for $1.00, no price slip.
- Sell on MAYAChain for $1.20, no price slip.
- Total Profit: 20%
The trader can then continue to arbitrage for a profit of 20% continuously.
If both markets have finite liquidity, but one is much deeper than the other, then the one of the markets will slip in price after the trade. However, the Arbitrageur will experience a price that is roughly the average of the price before and after the trade:
- Buy on External Market for $1.00, no price slip.
- Sell on MAYAChain for $1.20, realised price of $1.10, price slip to $1.00.
- Total Profit: 10%
After the trade, there is no more price differential, but the Arbitrageur made 10% in profit. The Arbitrageur has made the pool price equal to the secondary market. They have transferred price information from one market to another.
If both markets have low liquidity, then the Arbitrageur is attempting to make trades that slip each market towards each other:
- Buy on External Market for $1.00, realised price of $1.05, price slip to $1.10.
- Sell on MAYAChain for $1.20, realised price of $1.15, price slip to $1.10.
- Total Profit: >10%
The market now has no more price differential. The Arbitrageur has made each market equal to each other.
MAYAChain does not offer explicit incentives to Arbitrageurs – it does not reward or punish them. Trading profits are determined by the capacity of Arbitrageurs to seek out and capitalize on price differentials between MAYAChain and external markets.
The majority of arbitrage opportunities will be exercised by software bots. These are under development by 3rd party entities and will be released in due time. They will be open-source and available for anybody to run.
Last modified 5mo ago