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Arbitrage & Market Making

Profit from price differences and provide liquidity to earn trading fees.

The Strategy

Two complementary strategies:

  1. Arbitrage: Buy low on one venue, sell high on another
  2. Market Making: Provide liquidity to earn fees from traders

Skills needed: Moderate-Advanced
Capital required: $5k+ minimum
Time commitment: Active monitoring or automation

Strategy 1: Cross-DEX Arbitrage

The Concept

Price differences exist between platforms:

  • STRATO DEX: ETHST = $3,000
  • Uniswap: ETH = $3,015
  • Opportunity: Buy on STRATO, sell on Uniswap, profit $15

Why it exists:

  • Different liquidity depths
  • Trading activity imbalances
  • Bridge delays
  • Market inefficiencies

Complete Example: ETHST Arbitrage

Setup:

  • Capital: $10,000 USDST - Split: $5k on STRATO, $5k on Uniswap (Ethereum)
  • Assets: USDST on both chains

Opportunity spotted:

  • STRATO: 1 ETHST = $2,990 USDST
  • Uniswap: 1 ETH = $3,010 USDC
  • Spread: $20 (0.67%)

Execution:

  1. Buy on STRATO:

  2. Swap $2,990 USDST → 1 ETHST

  3. Fee: 0.3% = $9

  4. Cost: $2,999 per ETHST

  5. Bridge ETH to Ethereum:

  6. Bridge 1 ETH to Ethereum

  7. Time: 15 minutes

  8. Cost: ~$15

  9. Sell on Uniswap:

  10. Swap 1 ETHST → $3,010 USDST - Fee: 0.3% = $9

  11. Receive: $3,001 USDST

  12. Bridge USDC back:

  13. Optional: Keep capital balanced

  14. Or accumulate on one side

Result: 

Bought: $2,999
Sold: $3,001
Bridge: $15
Net: -$13 ❌

Wait, we lost money!

When Arbitrage is Profitable

Break-even calculation:

Profit = Spread - (Swap fees + Bridge costs)
$20 - ($9 + $15 + $9) = -$13

Minimum profitable spread:
$33 / $3,000 = 1.1%

Need at least 1.1% price difference

Profitable opportunities:

  • High volatility (spreads widen)
  • Large trades (better $/tx ratio)
  • Lower bridge costs (L2s, not Ethereum)
  • Flash opportunities (> 2% spreads)

Reality: Most arbitrage is done by bots that:

  • Execute in milliseconds
  • Use flash loans (no capital needed)
  • Have lower fees (market makers)
  • Can capture 0.1-0.5% spreads profitably

Strategy 2: On-Chain Arbitrage (No Bridge)

The Concept

Find price differences within STRATO:

Example routes:

  • Direct: USDST → ETHST (one swap)
  • Routed: USDST → USDST → ETHST (two swaps)

If routing is cheaper, arbitrage exists!

Complete Example: Routing Arbitrage

Scenario:

Direct swap:

  • USDST → ETHST: Rate = $3,000 per ETHST

Routed swap:

  • USDST → USDST: Rate = 1:1 (stable pair, low fee)
  • USDST → ETHST: Rate = $2,985 per ETHST (lower price!)

Opportunity:

  • Buy via route: $2,985 + fees
  • Sell direct: $3,000
  • Profit: ~$12 per ETHST

Execution:

  1. Buy ETHST via route:

  2. Swap $2,985 USDST → USDST (0.05% fee = $1.50)

  3. Swap $2,985 USDST → 1 ETHST (0.3% fee = $9)

  4. Total cost: $2,995.50

  5. Sell ETHST direct:

  6. Swap 1 ETHST → $3,000 USDST (0.3% fee = $9)

  7. Receive: $2,991 USDST

Result: 

Bought: $2,995.50
Sold: $2,991.00
Loss: -$4.50 ❌

Still not profitable!

Why:

  • Fees eat the spread
  • Need larger price differences
  • Or market maker fee tier (< 0.3%)

Strategy 3: Liquidity Providing (Market Making)

The Concept

Instead of chasing arbitrage:

  • Provide liquidity
  • Earn fees from OTHER people's trades
  • More passive, more reliable

Your role: Be the "house" not the "gambler"

Complete Example: Concentrated Liquidity

Starting capital: $10,000 (5 ETHST @ $2,000 or equivalent)

Choose pool: ETHST-USDST (high volume)

Strategy decision:

Option A: Wide range (passive) - Provide liquidity: $1,500-$3,500 ETHST price range - Always in range - Lower fees but consistent - APR: 8-12%

Option B: Narrow range (active) - Provide liquidity: $1,950-$2,050 (±2.5%) - Higher fees when in range - Must rebalance frequently - APR: 20-40% when in range

Implementation: Narrow Range Strategy

Starting position:

  • Price: $2,000
  • Range: $1,950-$2,050
  • Capital: 2.5 ETHST + $5,000 USDST

Deploy liquidity:

  1. Go to Advanced (in sidebar) → Swap Pools tab
  2. Select ETHST-USDST pool

  3. Choose concentrated range:

  4. Min: $1,950

  5. Max: $2,050

  6. Deposit:

  7. 2.5 ETHST

  8. $5,000 USDST
  9. Click "Add Liquidity" (~$0.10 gas, approvals automatic)

Result: 

✅ Providing liquidity: $10,000
✅ Active range: $1,950-$2,050
✅ Expected daily volume: $500k
✅ Your share: ~2%
✅ Daily fees: ~$30 (0.3% daily = ~110% APR)

Too good to be true?

Managing Concentrated Liquidity

Scenario 1: Price Stays in Range

Days 1-5: ETHST = $1,980-$2,020 - Your liquidity is active - Earn fees: ~$30/day × 5 = $150 - No action needed ✅

Weekly return: $150 on $10k = 1.5% (78% APR)

Scenario 2: Price Moves Out of Range

Day 6: ETHST pumps to $2,100

Your position:

  • All converted to USDST (sold ETHST automatically)
  • Now have: ~$10,150 USDST, 0 ETHST
  • Out of range = no fees earned ❌

Action needed:

  1. Remove liquidity
  2. Rebalance: Buy some ETHST back
  3. Set new range: $2,050-$2,150
  4. Re-provide liquidity

Costs:

  • Remove + re-add: ~$0.60 gas
  • Swap fee: ~$30
  • Time: 10 minutes

Was it worth it? - Earned: $150 in 5 days - Rebalancing cost: ~$31 - Net: $119 ✅

Scenario 3: Price Whipsaws

Week 1:

  • Price: $1,900 → $2,100 → $1,950 → $2,080

Your experience:

  • Out of range 3 times
  • Rebalanced 3 times
  • Fees earned: $200
  • Rebalancing costs: $90
  • Net: $110

vs Wide Range:

  • Would have earned: $80
  • No rebalancing: $0 cost
  • Net: $80

Narrow range still better, but more work

Impermanent Loss Reality Check

What is IL?

When you provide liquidity:

  • You hold equal value of both assets
  • As prices change, your holdings rebalance automatically
  • vs just holding assets, you may have less

Example:

Start:

  • Provide 1 ETHST ($2,000) + $2,000 USDST
  • Total: $4,000

ETH doubles to $4,000:

If you just held:

  • 1 ETHST = $4,000
  • $2,000 USDST
  • Total: $6,000

As LP:

  • 0.707 ETHST = $2,828
  • $2,828 USDST
  • Total: $5,656
  • IL: $344 (5.7%)

But you earned fees:

  • Trading fees: $450 (over time)
  • Net: $450 - $344 = $106 profit ✅

IL is offset by fees

Comparing Strategies

Strategy Capital Time Skill Annual Return Risk
Cross-DEX Arb $10k+ Active High 5-20% Medium
On-Chain Arb $5k+ Very Active High 10-30% Low
Wide LP $1k+ Passive Low 8-15% Low
Narrow LP $10k+ Active Medium 20-50% Medium
Market Making Bot $50k+ Automated Very High 30-80% Medium

Recommendation for most users: Wide range LP - Passive income - Reliable returns - Low maintenance

Advanced: Automated Market Making

Bot Strategy

Components:

  1. Monitor prices across all pools
  2. Detect price imbalances
  3. Execute swaps automatically
  4. Rebalance LP positions when needed

Requirements:

  • Programming skills (Python/TypeScript)
  • Server to run bot 24/7
  • Smart contract integration
  • Risk management logic

Expected returns:

  • Manual active LP: 20-30% APR
  • Semi-automated: 30-50% APR
  • Fully automated bot: 50-100% APR (but requires expertise)

Risks:

  • Smart contract bugs
  • Bot logic errors
  • Flash loan attacks
  • Rug pulls in new pools

Not recommended unless experienced developer

Risk Management

For Arbitrage

Risks:

  1. Execution risk: Price moves during trade
  2. Bridge risk: Assets stuck or lost
  3. Gas spikes: Ethereum fees eat profit
  4. Slippage: Large trades have price impact

Mitigations:

  • Use small positions first
  • Set slippage limits
  • Monitor bridge status
  • Check gas before bridging

For Market Making

Risks:

  1. Impermanent loss: Price movements reduce value
  2. Smart contract risk: Protocol exploits
  3. Pool rug pulls: Fake tokens or exit scams
  4. Low liquidity: Can't exit position

Mitigations:

  • Stick to major pairs (ETHST-USDST, etc.)
  • Use audited protocols only
  • Diversify across pools
  • Monitor IL regularly

Tax Implications

Every swap is taxable:

Arbitrage:

  • May execute 10-50 trades/day
  • Each swap = taxable event
  • Complex record keeping
  • Consider tax software (Koinly, etc.)

Market Making:

  • LP fees = taxable income (continuously)
  • Adding/removing liquidity = swaps (taxable)
  • Impermanent loss ≠ realized loss (until exit)
  • Track cost basis carefully

Recommendation:

  • Use automated tax tools
  • Consult crypto tax specialist
  • Keep detailed logs
  • Consider tax-deferred accounts if possible

Real Example: Professional LP

User: Carlos

Strategy: Active narrow-range LP

Capital: $50,000

Pairs:

  • ETHST-USDST: $25k
  • WBTCST-USDST: $15k
  • USDST-USDST: $10k

Time commitment: 30 min/day

Results over 3 months:

Pool Fees Earned IL Net APR
ETHST-USDST $2,100 -$350 $1,750 28%
WBTCST-USDST $1,350 -$180 $1,170 31%
USDST-USDST $280 -$5 $275 11%
Total $3,730 -$535 $3,195 26%

Carlos's routine:

  • Morning: Check positions, rebalance if needed
  • Evening: Claim fees, compound
  • Weekly: Adjust ranges based on volatility

His takeaway: "Treat it like a job, it pays like one"

Getting Started

Week 1: Learn

  • [ ] Read all LP documentation
  • [ ] Understand IL concept
  • [ ] Study pool mechanics
  • [ ] Watch prices for a week
  • [ ] Identify opportunities

Week 2: Test

  • [ ] Start with $500-1,000
  • [ ] Choose stable pair (USDST-USDST)
  • [ ] Wide range (low risk)
  • [ ] Track daily performance
  • [ ] Learn the UI

Week 3: Scale

  • [ ] If comfortable, add capital
  • [ ] Try volatile pair
  • [ ] Experiment with ranges
  • [ ] Set up tracking spreadsheet
  • [ ] Optimize based on data

Month 2+: Optimize

  • [ ] Analyze best pools
  • [ ] Refine range strategy
  • [ ] Consider automation
  • [ ] Compound earnings
  • [ ] Scale to target size

Tools & Resources

Tracking Tools

Portfolio dashboards:

  • DeBank
  • Zapper.fi
  • APY.vision (advanced IL tracking)

Pool analytics:

  • STRATO pool stats page
  • Volume charts
  • Fee tier analysis

Price monitoring:

  • TradingView
  • CoinGecko
  • Telegram price bots

Calculators

LP profitability:

  • dailydefi.org/tools/impermanent-loss-calculator
  • defi-lab.xyz/uniswapv3simulator

Arbitrage:

  • Custom spreadsheets
  • Real-time price feeds
  • Profit calculators (build your own)

Common Mistakes

❌ Providing to Low-Volume Pools

Problem: No trades = no fees

Fix:

  • Check 24h volume
  • Minimum $100k daily volume
  • Stick to major pairs

❌ Ignoring Impermanent Loss

Problem: Price moves, but you focus only on fees

Fix:

  • Calculate IL regularly
  • Ensure fees > IL
  • Exit if losing money

❌ Over-Concentrating Range

Problem: Price moves out of range constantly

Fix:

  • Start wide
  • Narrow gradually based on data
  • Balance active time vs fees

Summary

Arbitrage:

  • High skill, active management
  • Profit opportunities exist but small
  • Better suited for bots
  • 5-20% APR for retail

Market Making (LP):

  • More accessible
  • Passive to semi-active
  • Reliable income
  • 8-50% APR depending on strategy

Recommendation: Start with wide-range LP

Next Steps

Learn More

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