Arbitrage execution and protection.

The Auto-Balancer aims to capitalise on arbitrage opportunities across different exchanges without having to move assets immediately. For our discussion, let’s assume you have 10,000 USDT and 10,000 ARB in your accounts on both Kraken and Binance, and you are responsible for the sustainability for ARB across both of these centralised exchanges.

How it Works

The principle is simple: instead of transferring assets to exploit price differences, we execute near-simultaneous trades on both exchanges, using the existing balances. After the arbitrage has been carried out, Auto-Balancer balances the asset holdings to their initial state as a separate step.

A Case Study: ARB/USDT on Kraken and Binance

For the purpose of this example, let’s simplify things by assuming a 0% maker & taker fee structure, as well as zero withdrawal fees. Let’s also assume that there is 1,000 ARB of liquidity for both the bid and ask orders on the orderbook at the example prices. While these are not the actual market conditions you’ll encounter, our Auto-Balancer algorithm is engineered to account for all these real-world variables to still turn a profit.

Market Prices

Kraken’s ASK price for ARB: 1,000 ARB @ 1.0 USDT

Binance’s BID price for ARB: 1,000 ARB @1.1 USDT

Step 1: Arbitrage Execution

1. On Kraken: Utilise 1,000 USDT from the existing balance to buy ARB at 1.0 USDT, which gives you 1,000 ARB.

2. On Binance: Almost at the same time, sell 1,000 ARB from your existing balance at a BID price of 1.1 USDT. This yields 1,100 USDT.

By doing so, you’ve earned a risk-free profit by leveraging the existing balances on both exchanges.

Step 2: Inventory Balancing

After executing the arbitrage, your asset allocation would look like this:

  • On Kraken: 10,000 USDT — 1,000 USDT = 9,000 USDT and 11,000 ARB

  • On Binance: 10,000 USDT + 1,100 USDT = 11,100 USDT and 9,000 ARB

Inventory Balancing Actions:

  1. Transfer the USDT difference: To bring both USDT holdings to the same value (10,050 USDT) transfer half the difference between the two accounts. This would be 1,050 USDT transferred from Binance to Kraken.

  2. Transfer the ARB difference: To bring both ARB holdings to 10,000 transfer half the difference between the two accounts. This would be 1,000 ARB transferred from Kraken to Binance.

After these transfers, both Kraken and Binance will hold 10,050 USDT and 10,000 ARB each. You’ve balanced your inventory while retaining your arbitrage profit of 100 USDT, which is now evenly distributed across both exchanges.

And there you have it! Your inventory is balanced

Arbitrage Math

The arbitrage has netted you a profit of 100 USDT, without waiting for assets to transfer between exchanges, thereby reducing the risk of price fluctuations affecting the arbitrage opportunity. Here is the simple maths behind it:

Why is this function so important? Imagine a third party beats you to these arbitrage opportunities. That’s not just a missed chance for profit; it’s your liquidity being drained and your treasury taking a hit. We’re talking permanent, not impermanent, loss here. Inattention to these arbitrage gaps can result in astonishing losses over time.

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