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What is Arbitrage?

It's the difference in price that the same asset can have between different marketplaces. This difference in price can allow you to buy the item from the marketplace with the lowest price, then sell that same item to another marketplace that will buy the item from you for a higher price. This allows someone to make a profit by buying an item at a low price, then sell that same item at a higher price - in order to make a profit.

How does Arbitrage work in crypto?

Much like the marketplace example above, Decentralized Exchanges (DEX) and Centralized Exchanges (CEX) act as the "marketplaces" for crypto where you can shop for the best low price of a crypto asset (coin, token, NFT, etc), then find another DEX or CEX to sell that same crypto for more money, than what you originally paid, giving you profit!

How to Arbitrage with Liquidity Pools (LP)?

What is even better, you can also do arbitrage in the same DEX or CEX because they offer different liquidity pools - these are essentially mini marketplaces inside the same CEX or DEX. A liquidity pool is comprised of a pair of crypto assets that can be swapped for one another. For example, a SGO/BNB LP on the DEX called Pancake swap, will allow you swap your BNB for an amount of SGO based on how much SGO is worth compared to BNB. You can also do the opposite and swap SGO for an amount of BNB based on how much SGO is worth compared to BNB.

Putting it all together...

A typical Arbitrage strategy example with SGO:
  1. 1.
    Look for a time when SGO price is low (like during the early stages of the SGO launch on May 27th, 2023 or after a big sell-off of SGO).
  2. 2.
    Look at each of the LPs that offer SGO (SGO/BNB, SGO/SAFUU, etc) and then BUY SGO from the LP that offers the LOWEST price for SGO. (you can do this immediately or wait and watch for the price of SGO to go even lower).
  3. 3.
    Next, look for the LP that offers SGO at a highest price and sell your SGO in that LP to receive the other LP crypto asset in exchange. (You can do this immediately or you can wait and watch for the price of SGO to go even higher).
  4. 4.
    Now, to complete your path to some potential profit, SELL that crypto asset you just received from step #3 into an LP that offers both SGO and the crypto asset that you have to sell. If you chose the LPs wisely and timed your BUY/SELL, you could have a profit at the end (the difference in how much you invested compared to how much you finally received).
The process you just did is called Triangular Arbitrage where you use 3 LP's in an attempt to gain a profit from your original investment.