🎟️Dedicated Arbitrageurs
Last updated
Last updated
Maximize: MEV extracted
Minimize: fees paid to miners, LPs, gas
Arbitrage is an essential part of DeFi protocols because it ensures the assets underpinning the protocol are priced accurately. However, when the fees charged to arbitrageurs are incorrect liquidity providers pay the price. This is a systematic issue with the majority of top DEXs today, see volume figures below.
There has been a lot of great research and discussions on how to tackle this problem. Some research even suggests that a pure arbitrage-driven DEX will be profitable for LPs as long as there's a non-zero swap fee in a hypothetical zero gas cost environment.
However, in reality, there are transaction costs and expenses needed to be paid for arbitraging DEXs like gas costs and miner fees. And we know the LPs on Uniswap end up eating a lot of toxic order flow and aren't compensated enough for it, see how we address this in the Liquidity Provider section.
Given the nature of long-term swaps in TWAMMs, there's a consistent back-run opportunity created for arbitrageurs. Unlike atomic DEXs where this is a negative externality for swappers, long-term swappers rely on arbitrageurs to ensure the price of assets is always fresh.
See the incentives section for further details on how arbitrage is a positive externality given dedicated arbitraging.
By partnering with the protocol and agreeing to remit part of the MEV back to LPs, dedicated arbitrageurs get a lower swap rate. So instead of paying profits to miners to place their transaction at the top of the block, it instead goes to the LPs who are the rightful recipients.
Since dedicated arbitrageurs don't have to compete in the mempool, the other fixed cost that can be optimized is gas cost. Low gas costs required to arbitrage the pools are essential because when the gas cost is low, more arbitrage happens which leads to better order fills and more swap fees for LPs.
Building on Balancer gives arbitrageurs access to another secret weapon Flash Swaps. With flash swaps, there are no asset transfers needed therefore no gas costs are incurred, but simply relaying the accounting difference to the Vault is enough to arbitrage the pool.
