AlphaX (now available on Avalanche) is the second DeFi product from Alpha Finance Lab which brings an innovative way to profit from crypto volatility by introducing a new concept - Strike Token. If you are new to AlphaX, you can read in more details here.
There are multiple ways users can profits from using AlphaX. Just to name a few, users can trade, provide liquidity, become liquidators or even become arbitrageurs.
What is Arbitrage?
Traditionally, arbitrage refers to when someone purchases an asset in one market (it could be any stock, commodity or currency) and simultaneously sells it in different markets at a higher price to profit from the differences in the asset market price. Usually, arbitrage opportunities are short-lived and would be gone after arbitrageurs take profits. It’s a mechanism to make sure that prices do not deviate significantly from fair value (or among different markets) for a long period of time.
Spotting Arbitrage Opportunity on AlphaX
Arbitrage opportunities on AlphaX occur when there is a price deviation between a Strike Token’s market price (M) and oracle price (O). Arbitrageurs could take advantage of the opportunity by simultaneously obtaining (whether by minting or buying) and discarding (whether by redeeming or selling) Strike Tokens. On AlphaX, market prices are referred to when users buy or sell that Strike Token from the Trade section, while oracle prices are referred to when users mint or redeem that particular Strike Token on Mint or Redeem section respectively. (learn more about Mint and Redeem here)
Depending on the price situations at that time, users can easily identify an arbitrage opportunity by referring to Premium/ -Discount, calculated from [(M-O)/O]. The larger the numbers, the larger the price gap between M and O.
What Are The Next Steps?
The logic is simple: you can arbitrage by obtaining Strike Token at a lower cost then discarding them at a higher price for profit margins.
For instance, for the scenario when both Long and Short Strike Token market prices are higher than the oracle prices, users can mint a pair of a Long and a Short Strike Token at their oracle prices, then immediately sell both tokens at market price to earn instant profit.
However, if users don’t want to realize their profits immediately, they also have the option to hold any token to gain exposure to the underlying asset or provide liquidity to Strike Token/USDC pools to earn more rewards on top.
Here's an example to help you understand better: if the price of AVAX is $105,
Users do the following to instantly gain arbitrage profit:
- Supply 94.50 USDC (=44.50+50.00) to mint 1 AVAX-60.5 and 1 155-AVAX
- Sell newly minted AVAX-60.5 for $48.50 earning $4 or 8.99% instant profit
Then, users are left with 1 newly minted 155-AVAX token which they could either:
- Immediately sell for $49.00 then earn net profits of $3 (= 97.5-94.5) or 3.17% from the whole transaction
- (or) Hold 155-AVAX to gain short exposure to AVAX, if he is bearish on AVAX or want to use it as a hedging tool (learn more)
- (or) Provide liquidity to 155-AVAX/USDC liquidity pool to earn rewards which will help lessen the short exposure
How should I get started?
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