Arbitrage Strategies

These strategies capitalize on market inefficiencies and generate consistent profits by utilizing cutting-edge technology. Analyze real-time market data to find and execute profitable arbitrage trades

ETH MODRATE ARBITRAGE (EMA)

This is a low-risk financial algorithmic strategy adopting a hedging strategy, whose annualized rate of return is 5%–50%. During the period of 2022/3/15–2023/3/16, the total return was 28.35%, and the maximum drawdown was 1.28% during this period.

Bearing little risk, if you are still seeking a financial management strategy that has a much higher rate of return than savings, Algoo Strategies' “ETH Arbitrage algorithm (Moderate Mode)” is exactly what you are looking for.

Full Description

After trading off between risk and return, “ETH Arbitrage Strategy (Moderate Mode)” takes ETH as the only coin to arbitrage.

The algorithm buys ETH in the spot market while selling ETH (open short) of the same amount in the futures market. By using this method, the ETH arbitrage strategy is able to receive interest (funding fees) paid to the short position while keeping a market-neutral portfolio.

This strategy makes use of HEDGING.

Hedging is a strategy to offset potential losses or gains that a companion investment may incur. A hedger will sell coins in the futures market in advance to lock in the current profit and avoid potential losses caused by price fluctuations.

Algoo strategies ETH arbitrage algorithm adopts this strategy.

Let’s say we have 10,000 USDC for the ETH arbitrage algorithm (Moderate Mode), while each ETH is worth 4000 USD in both the spot & futures markets.

1. The algorithm will first buy 2.5 ETH in the spot market and then sell it in the futures market and open a short position worth 10000 USD.

2. As it sold all the ETH for USD, the algorithm is equivalent to holding 10,000 USD in the futures market. In this case, the value of your assets will never change, regardless of the price fluctuation of ETH.

When the algorithm closes its position:

If the price of ETH surges up to 10,000 USD/ETH, it will receive 1 ETH after it closes its short position. And after selling it in the spot market, it will get 10,000 USDC back safely.
If the price of ETH goes down to 400 USD/ETH, it will receive 25 ETH after it closes its short position. And after selling it in the spot market, it will still get 10,000 USDC back.

Estimated returns and source of yield

The target ROI for this strategy is 30%

Source of yield:



Perpetual contracts are widely offered by crypto-derivative exchanges, and are designed similarly to traditional futures contracts. 

The most important difference between traditional contracts and perpetual contracts is that perpetual contracts don’t have an expiration date. Since perpetual futures contracts never settle in the traditional sense, exchanges introduced funding rates to ensure that futures prices and index prices converge on a regular basis. Funding rates are periodic payments (settled every 8 hours at UTC+0 0:00, 8:00, and 16:00) either to traders that are long or short based on the difference between perpetual contract markets and spot prices:

1. When the price of the perpetual contract is much higher than that of the spot, the funding rate is positive. Thus, traders who are long pay for short positions. 

2. Conversely, when the price of the perpetual contract is much lower than that of the spot, the funding rate is negative.  Thus, traders who are short pay for long.

3. When the prices in the two markets are pretty close, the long position should pay interest to the short, fixed at 0.03% daily. The funding rate will be 0.01%, and the long will pay to the short.

The funding fee is the arbitrage profit earned by the Algoo Strategies ETH arbitrage profit. The funding fee will be settled to the user's account every 8 hours by holding a short position in the perpetual futures market.

According to the historical data of the ETH funding rate on Binance, in most cases, the short position will receive funding fees paid by the long position. During 2022/3/15-2023/3/16, 90% of the funding rates were settled at positive, and the maximum drawdown caused by the negative funding rate was only 1.28% during the whole year.
Besides, when the prices surge, the funding fee will be extremely high, and the annualized rate of return for the arbitrage could reach up to 100%+ in one settlement.

Underlying coins and protocols

Coins : ETH, USDC

Protocols: Binance, Opyn V2

Strategy pros

Diversification: Since the strategy involves trading on multiple exchanges, it can help diversify the risk of trading on a single exchange.
Auto-settlement: After receiving the funding fee, the strategy will automatically settle it by adding to the short position. By doing so, you can get compounding interest by auto-settlement.
High efficiency: Compared to manual arbitraging, the strategy can buy the spot and open the short position simultaneously, avoiding the increasing price gap caused by the time difference between buying and selling.

Strategy cons

Auto-deleveraged (ADL). The ETH arbitrage algorithm (moderate mode) adopts the arbitrage strategy with extremely low risk. The only risk is that the short position is auto-deleveraged (ADL) and the algorithm fails to sell the ETH in the spot market in time. However, the probability of this happening is extremely small. Firstly, auto-deleverage will only happen when there is a sudden drop in the ETH price. Additionally, as the arbitrage bot (Moderate mode) is not leveraged, the short position ranks at the bottom in the ADL list.

Strategy address: https://debank.com/profile/0x29414ec76d79ff238e5e773322799d1c7ca2443f

Maximum capacity: $27,000,000

SPOT-FUTURES AGGRESSIVE ARBITRAGE(SPFAA)

The strategy involves holding a short position on USDC in the perpetual futures market and buying the same amount of USDC in the spot market, therefore hedging the total investment.The investments won’t be affected by market fluctuations due to the market-neutral position but will receive funding rates with our short position in the perpetual futures contracts.

We shall delve into the fundamentals of perpetual futures contracts first, before discussing how the arbitrage opportunity is executed.

What is Perpetual Futures Contracts?

Unlike traditional futures, perpetual futures contracts don’t have an expiration date, so traders can trade perpetual futures just like spot trading. That’s one of the main reasons perpetual futures contracts is so popular in the crypto community.

Typically, traditional futures contracts settle on a monthly or quarterly basis. At settlement, the contract price converges with the spot price, and all open positions expire.

Since perpetual futures contracts never settle in the traditional sense, exchanges need a mechanism to ensure that futures prices and index prices converge on a regular basis. This mechanism is also known as Funding Rate.

The funding rate plays an essential role in this particular arbitrage opportunity that we’re going to discuss in the next section.

What is the funding rate?

The funding rate ensures that futures prices and index prices converge regularly.

So when a perpetual futures contract is trading at a premium (higher than the spot market), long positions have to pay shorts due to a positive funding rate. In contrast, short positions pay longs while the futures price is trading below the index price.

The index price consists of the average price of an asset according to major spot markets and their relative trading volumes.

The exchanges do not charge the funding fee. It’s paid peer-to-peer.

Most of the investors in the crypto market prefer to hold a long position rather than a short position, which means traders with long positions need to pay funding rates to those who have a short position.

Full description

This type of arbitrage is designed to hold a short position in the perpetual futures market while holding the same amount of position in the spot market.

The key feature of this strategy is that it maintains a market-neutral position, which means that it is not exposed to the overall market direction. Instead, it takes advantage of the differences in prices between the two the markets to generate profits. One way it does this is by receiving the funding rate every 8 hour, which is a fee paid by long positions in the perpetual futures market to short positions like the one held by the algorithmic trading strategy.

By holding a short position in the perpetual futures market, the algorithmic trading strategy is effectively betting that the price of the underlying cryptocurrency will go down. At the same time, it is holding an equal number of positions in the spot market, which means it is effectively betting that the price of the cryptocurrency will stay the same or go up. By balancing these positions, the strategy is able to generate profits regardless of the overall market direction.

How the spot-futures arbitrage algorithm works

Let’s say an amount of 10000 USDC is being deposited into spot-futures arbitrage strategy while Wrapped bitcoin’s(WBTC) price is 10000 USDC. Here’s what the algorithm does:

Transfer 5000 USDC to the futures account and the rest of 5000 USDC to the trading account.
Buy 0.5 WBTC (5000 USDC) in the spot market and short 0.5 WBTC in the perpetual futures market with 5000 USDC.
If the current funding rate is 0.05% right before the charges, then you’ll get 2.5 USDC. 0.5 * 10000 * 0.05% = 2.5 USDC
If the funding rate remains at 0.05%, we can receive 3 times a day, which means it's a 27.375% APR. 2.5 * 3 * 365 = 2737.5 USDC 2737.5 / 10000 * 100% = 27.375%

To increase the annualized return, the algorithm takes advantage of the leverage in the perpetual futures. When it holds the short position with 2x leverage, it's able to buy 0.6666 WBTC with 6666 USDC while shorting 0.6666 WBTC with 3333 in the perpetual futures market.

It’ll earn 33% more in funding fees (3.333 USDC) compared to 1x leverage. 0.666 * 10000 * 0.05% = 3.333 USDC

The Spot-Futures Arbitrage Strategy is designed to be fully automated, which means that it can execute trades and monitor the markets 24/7. This allows it to take advantage of opportunities as they arise, without the need for human intervention. The strategy is also designed to be scalable, which means it can handle large volumes of trades without affecting market prices.

Estimated returns and source of yield

Funding rates earned from short positions in perpetual futures contracts: The funding rate comprises two components: the interest rate and the premium. The interest rate is fixed at 0.01% per 8 hours, and the premium varies according to the price difference between the perpetual contract and the mark price.

According to the historical data of the ETH funding rate on Binance, the rate has always been positive in the last 6 months. And it’s higher when the price surges, as shown in the following chart. If we can receive a 0.2% funding rate per day, the performance for this arbitrage would be 36.5% APR

With the historical data, it’s steady and almost risk-free to arbitrage from the funding rate

The target ROI is 36.46% with 2x leverage.

and 41.0625% ROI with 3x leverage!

Underlying coins and protocols:

Coins and tokens: USDC

Protocols: Binance, Huobi

Strategy pros

Profit potential: The strategy has the potential to generate profits through exploiting pricing inefficiencies between the spot and futures markets.
Market-neutral position: The strategy is designed to maintain a market-neutral position, meaning that it is not significantly exposed to market movements in either direction. This can reduce overall risk and volatility.
Funding rate: By holding a short position in the perpetual futures market and a corresponding position in the spot market, the strategy can receive funding rates every 8 hours. This provides a steady stream of income.
Automated execution: The strategy is executed automatically through algorithmic trading, allowing for quick and efficient trades.

Strategy cons

Exchange risks: The strategy depends on the ability to execute trades on multiple exchanges simultaneously. This introduces the risk of exchange downtime or technical issues that can prevent trades from being executed.

Fees

Performance fee: 20% of weekly profit (only if the strategy has generated profit); fees are deducted directly from the strategy shares each week.

If the user exits the investment strategy before the settlement day, then we calculate the difference between the current price and the price of the last settlement period and take 20% of the profit. If there is no profit, then the user does not pay performance fee.

Performance fee = [Current price - last price] * 0.2

Swap Fee

From Stables to Strategy — 0% platform fee + ~0.2% market spread
From ETH to Strategy — 0.3% platform fee + ~0.2% market spread
From BTC to Strategy — 0.3% platform fee + ~0.2% market spread
From all others to Strategy — 0.2% platform fee + ~0.2-0.8% market spread

Strategy address: https://debank.com/profile/0xf66d90496a2687d7b36be74e5beed0c9f7cdaa9c

Maximum capacity: 50,000,000 USDC

LIQUIDTY POOL ARBITRAGE (LPA)

LPA is one strategy to take advantage of arbitrage opportunities across multiple MATIC pools in the polygon network. This strategy involves exploiting price differences between 4 different decentralized exchanges (DEXs) that are part of a shared liquidity pool of mainly Polygon based tokens. This strategy may generate up to 55% ROI, while investors also benefit from the price appreciation of the underlying tokens.

Full Description

The algorithm monitors the prices and liquidity of targeted tokens across four DEXs, looking for any price differences and arbitrage opportunities. When a profitable opportunity is identified, the algorithm calculates the most efficient way to execute the trade across the four DEXs, taking into account gas fees, slippage, and liquidity. The algorithm determines the optimal route for the trade, which may involve selling a token on Uniswap, buying another token on Sushiswap, exchanging that token on 1inch, and finally selling it on Curve. The algorithm then automatically executes the trade by interacting with the smart contracts of each DEX, using the appropriate liquidity pools to swap the tokens. Finally, the algorithm collects the profits from the arbitrage trade and transfers the tokens back to the original wallet.

Polygon liquidity pools utilized by the LPA algorithm

1. MATIC Pools on QuickSwap: QuickSwap is a decentralized exchange built on the Polygon network, offering efficient and low-cost trading. By utilizing the MATIC pools on QuickSwap, the Liquidity Pool Arbitrage Strategy takes advantage of the liquidity and trading volume available on this popular platform. The rationale behind selecting these pools is to capture yield opportunities arising from price discrepancies and trading activities within the MATIC ecosystem.

2. MATIC Pools on Sushiswap: Sushiswap is another prominent decentralized exchange operating on the Polygon network. By utilizing the MATIC pools on Sushiswap, the strategy taps into additional liquidity sources and trading opportunities. The rationale for selecting these pools is to diversify exposure and maximize yield potential by leveraging the trading activities and liquidity available on Sushiswap.

3. crvUSDBTCETH Pool on Curve: Curve is a decentralized exchange known for its low slippage and low fee structure. The Liquidity Pool Arbitrage Strategy incorporates the crvUSDBTCETH pool on Curve, which allows for trading between stablecoins and BTC/ETH pairs. By participating in this pool, the strategy benefits from the liquidity and stability of stablecoins while capitalizing on potential price discrepancies and arbitrage opportunities.

4. MATIC+PAW on Polycat: Polycat is a yield farming platform on the Polygon network that offers various liquidity pools. The Liquidity Pool Arbitrage Strategy includes the MATIC+PAW pool on Polycat, which involves providing liquidity for the MATIC and PAW tokens. This pool offers the potential for attractive staking rewards and yield generation through farming activities.

The selection of these liquidity pools is based on careful analysis and consideration of factors such as liquidity depth, trading volume, stability, and potential yield opportunities. By leveraging these pools, the Liquidity Pool Arbitrage Strategy aims to optimize yield generation through arbitrage, capitalizing on price discrepancies, and utilizing the liquidity available in these pools.

Estimated returns and source of yield

The target ROI for this strategy is 55%, but it may vary based on liquidity in the pools and incentivisation of the protocols.

Source of yield: exploiting price inefficiencies between different pools, and liquidity providing rewards from participating in the individual pools. Rewards are automatically reinvested into the strategy and reflected in the price increase.

Underlying coins and protocols

Coins: MATIC, USDC, WETH, USDT, DAI

Protocols: QuickSwap, SushiSwap, Curve, PolyCat

Strategy pros

One Strategy. A single strategy from which to receive an attractive ROI from the most valuable DeFi projects in the current ecosystem.
Rebalancing. This strategy rebalances based on continuous monitoring, adapting it based on various market conditions.
Exposure to the upside following price increases of the DeFi tokens.
Liquidity. As liquidity pools are made up of assets contributed by multiple users, DEXs can offer high levels of liquidity, making it easier for the LPA strategy to buy and sell assets at fair market prices.

Strategy cons

DeFi Protocol Risk. Algoo Strategies builds strategies on top of fully audited protocols that have proven their sustainability, however, protocol vulnerabilities still exist. While Algoo Strategies monitors all positions 24/7, systematic DeFi risk is shared with investors.
High Gas Fees. Trading on DEXs usually incurs high gas fees due to the need to pay for transactions on the blockchain. This can make small trades less profitable, as the fees may eat into the potential gains.

Fees

Performance fee: 20% of weekly profit (only if the strategy has generated profit); fees are deducted directly from the strategy shares each week.

Performance fee = [Current price - last price] * 0.2

Swap Fee

From Stables to Strategy — 0% platform fee + ~0.2% market spread
From ETH to Strategy — 0.3% platform fee + ~0.2% market spread
From BTC to Strategy — 0.3% platform fee + ~0.2% market spread
From all others to Strategy — 0.2% platform fee + ~0.2-0.8% market spread

Address to monitor: https://debank.com/profile/0xa6a1539ac96d8917f70190379a4e6fa8a1ce7a50

MULTI-TOKEN SWAPPING ARBITRAGE (MTSA)

This strategy profits from price differences between multiple token pairs but across different decentralized exchanges (DEXs). The algorithm involves identifying profitable price discrepancies among selected multiple token pairs on various DEXs and executing trades to capture profits. With the ability to swap tokens between exchanges in a single transaction, this strategy may generate a 60% ROI, including profits from the increase in price of the underlying token.

Full Description

The MTSA strategy executes trade in the the following format

Identifying Price Discrepancies: The strategy monitors the price of USDC and DAI tokens across both SushiSwap and 1inch. It looks for instances where there is a significant price difference between the two DEXs for the same token pair.
Spotting the Opportunity: Let's say the strategy identifies that USDC is being traded at a lower price on SushiSwap compared to 1inch, while DAI is being traded at a higher price on SushiSwap compared to 1inch. This price discrepancy creates an arbitrage opportunity.
Executing the Trade: The strategy initiates the arbitrage by executing a multi-token swap. It swaps USDC for DAI on SushiSwap where the USDC price is lower, and simultaneously buys USDC with DAI on 1inch where the USDC price is higher. By the end of these trades, the algorithm had generated a profit from the price discrepancies between the two DEXs.
Maximizing Efficiency: To optimize the arbitrage, the strategy takes into account transaction fees, slippage, and gas costs associated with the trades. It calculates the most efficient route to execute the swap while considering the available liquidity and minimizing the impact on the market.
Rebalancing the Portfolio: After executing the arbitrage, the strategy rebalances the portfolio by adjusting the token holdings back to the desired proportions. This ensures that the strategy maintains a balanced exposure to both USDC and DAI while capitalizing on the arbitrage opportunity.
Monitoring and Iterating: The strategy continuously monitors the market conditions and price movements of USDC and DAI on SushiSwap and 1inch. If new opportunities arise or the existing arbitrage opportunity becomes less profitable, the strategy adapts accordingly by executing new trades or adjusting its positions.

Estimated returns and source of yield

The target ROI for this strategy is 60%.

Source of yield: arbitrage positions held on Sushiswap, 1inch, and Bancor protocol.

Underlying coins and protocols

Coins: USDC, DAI

Protocols: Sushiswap, 1inch

Please note that the list of protocols and tokens is subject to change. Algoo Strategies team will be posting updates for this strategy allocations in community Telegram

Strategy pros

Scalability. This strategy is scaled to handle large volumes of trades performed in milliseconds, making it possible to generate profits even with small price discrepancies.
Diversification. By executing trades across multiple tokens and DEXs, the multi-token swapping arbitrage strategy can help to diversify an investment portfolio, reducing the overall risk.
Higher potential returns. By taking advantage of price discrepancies between different DEXs, this strategy can potentially generate higher returns than simply holding a single asset.
24/7 Monitoring. The algorithm monitors the price difference between the DEXs 24 hrs a day, 7 days a week: By monitoring the price difference between the different DEXs, the algorithm can ensure that trades are executed at the most favorable price possible. This requires the algorithm to be continuously monitoring the market and reacting quickly to price changes.

Strategy cons

Limited arbitrage opportunities. The number of DEXs and tokens available for trading may limit arbitrage opportunities. This can limit the strategy's profitability and make finding profitable trades more difficult. The Algoo Strategies team is constantly integrating the strategy with well-researched, high-performing tokens to trade with.
Smart contract risks: Similar to liquidity pool arbitrage, there is a risk of smart contract vulnerabilities when using a multi-token swapping arbitrage strategy. Malicious actors may be able to exploit vulnerabilities in smart contracts to steal funds or manipulate trades.

Fees

Performance fee: 15% of weekly profit (only if the strategy has generated profit); fees are deducted directly from the strategy shares each week.

If the user exits the investment strategy before the settlement day, then we calculate the difference between the current price and the price of the last settlement period and take 15% of the profit. If there is no profit, then the user does not pay performance fee.

Performance fee = [Current price - last price] * 0.15

Swap fee:

From Stables to Strategy — 0% platform fee + ~0.2% market spread
From ETH to Strategy — 0.3% platform fee + ~0.2% market spread
From BTC to Strategy — 0.3% platform fee + ~0.2% market spread
From all others to Strategy — 0.2% platform fee + ~0.2-0.8% market spread

Strategy address: https://debank.com/profile/0x332f60edc783e4db3e0a18f8dfeb368ae178ccd9

FLASH LOAN ARBITRAGE (FLA)

The flash loan arbitrage strategy involves executing a series of trades on different DEXs within a single transaction, with flash loans serving as the liquidity source. The strategy takes advantage of price differences between DEXs to generate up to 45% ROI without depleting its own capital.

Full description

The flash loan arbitrage strategy is one of the prime strategies offered by Algoo Strategies. This strategy utilizes flash loans to make a profit by taking advantage of price discrepancies across different decentralized exchanges (DEXs). Flash loans are a type of loan that allows traders to borrow funds for a short period of time without requiring collateral, as long as the borrowed amount is repaid in the same transaction. In this case, the flash loan allows the arbitrage algorithm to access various uncollateralized lending systems widespread across many Ethereum-based Defi protocols, where it can receive a loan, execute highly calculated arbitrage with the borrowed asset, and return it to the lender all in one transaction.

The algorithm monitors the prices of ETH, USDC, USDT, and AVAX tokens across various Defi protocols, including Aave, BENQI, and Hegic. It then identifies a pricing inefficiency between the Defi protocols, such as a price difference between USDC and USDT on Aave and Uniswap V2. The algorithm borrows the necessary funds, in this case, USDC and USDT, through a flash loan from Aave. It then exchanges the borrowed tokens for ETH on Hegic, taking advantage of the pricing inefficiency. The algorithm then exchanges the newly acquired ETH for AVAX on BENQI, taking advantage of another pricing inefficiency.

Finally, the algorithm repays the flash loan to Aave and pockets the profit from the price differences.

In any case the strategy didn't yield any profit and the borrower is not able to repay the borrowed funds, the transaction is set to be automatically reversed, so there are no losses.

By using flash loans, the algorithm can execute these trades within a single transaction, avoiding the need to hold significant capital reserves. This strategy gathers a large amount of data from constant monitoring of pricing inefficiencies and is able to execute trades quickly.

Estimated returns and sources of yield

The goal of "Flash Loan Arbitrage" is to generate arbitrage yield on top of an uncollateralized borrowed position on Aave, BENQI, and Hegic. Rewards come from three sources:

Hegic arbitrage positions between USDC/USDT/ETH
Positions for arbitrage between AVAX/ETH on BENQI
Lending rewards on Aave

Target ROI: 45%

Underlying coins and protocols

Coins: ETH, AVAX, USDC, USDT

Protocols: AAVE, BENQI, Hegic

Strategy pros

No Risk of Liquidation: As flash loans don't require any collateral, traders don't have to worry about their positions being liquidated in the event of a market downturn.
Highly scalable: the protocols used in strategy are highly liquid, so that the strategy is able to scale to meet potential demand.
Risk management protocols: The Algoo strategies team has integrated risk management protocols, which include setting up limits on the amount of funds that can be borrowed by the strategy, monitoring the transaction for any suspicious activity, and having a backup plan in case of unexpected events.

Strategy cons

Competition: Flash loan arbitrage is a popular strategy, and there is intense competition from other traders, bots, and arbitrage firms. This can make it difficult to execute profitable trades, as prices can quickly adjust to reflect market conditions.

Fees

Performance fee: 20% of weekly profit (only if the strategy has generated profit); fees are deducted directly from the strategy shares each week.

Performance fee = [Current price - last price] * 0.2

Swap Fee

From Stables to Strategy — 0% platform fee + ~0.2% market spread
From ETH to Strategy — 0.3% platform fee + ~0.2% market spread
From BTC to Strategy — 0.3% platform fee + ~0.2% market spread
From all others to Strategy — 0.2% platform fee + ~0.2-0.8% market spread

Address to monitor: https://debank.com/profile/0x45115215a5a482dbc2f6b2074edcdd40c4f53ef1

ORNSTEIN-UHLENBECK (OU) REVERSION PROCESS

The basic idea behind the OU process trading strategy is to trade on the deviation of a token's price from its long-term mean value. The strategy involves taking long or short positions when the price of the token moves significantly away from its mean value, with the expectation that the price will eventually revert back to its mean value.

Full description

The OU process trading strategy estimates the mean value and volatility of the targeted token price using historical price data, and then uses these estimates to make trading decisions. When the price of the token moves away from its mean value by a certain threshold, the strategy will trigger a trade to take advantage of the expected mean-reverting behavior.

The algorithm's model consists of a stochastic differential equation that describes the movement of the token's price over time. The model takes into account the mean value of the token's price, the volatility of the price, and the speed at which the price reverts to its mean value.

The algorithm is integrated with three DEXs to trade on, each with their own liquidity pools for a particular token pair. The goal of the OU process is to determine when to buy and sell the token pairs.

The OU process is governed by a stochastic differential equation (SDE):

dX(t) = θ(μ - X(t))dt + σdW(t)

Where:

X(t) is the value of the asset at time t
θ is the speed of mean reversion.
μ is the long-term mean
σ is the volatility of the process.
W(t) is a Wiener process, which is a mathematical term for Brownian motion (random noise).

Before a trade can be executed, the parameters θ, μ, and σ are calibrated to the historical data of the asset prices. Once the parameters have been calibrated, the OU process can generate buy and sell signals.

For example, when trading the token pair ETH/USDC on three different DEXs: SushiSwap, Uniswap, and ShibaSwap, we have historical price data for the past year, and we use this data to calibrate the OU process parameters:

θ = 0.05
μ = 3500
σ = 50

These parameters indicate that the asset prices are mean-reverting with a speed of 0.05, a long-term mean of 3500, and a volatility of 50.

Now, suppose the current price of ETH/USDC on each of the three DEXs is as follows:

SushiSwap: 3400 USDC/ETH
Uniswap: 3450 USDC/ETH
ShibaSwap: 3550 USDC/ETH

The OU process determines whether to buy or sell on each DEX. If the current price is below the long-term mean, we should buy, and if it's above the long-term mean, the algorithm should sell. We can calculate the long-term mean as μ/θ = 3500/0.05 = 70000.

The OU process, can calculate the mean-reverting price for each DEX based on the current price and the calibrated parameters. The algorithm can then compare the mean-reverting price to the current price to determine whether to buy or sell:

SushiSwap: mean-reverting price = 7166.67 USDC/ETH, sell
Uniswap: mean-reverting price = 7183.33 USDC/ETH, sell
ShibaSwap: mean-reverting price = 7216.67 USDC/ETH, buy

Based on these calculations, the algorithm sells on SushiSwap and Uniswap and buys on ShibaSwap. The trades are executed automatically using smart contracts on each DEX.

The OU process algorithm would continuously monitor the market and adjust the trading strategy as needed. For example, if the price of ETH on Uniswap starts to drop unexpectedly, the algorithm might quickly sell off some of its holdings on that exchange and shift its focus to SushiSwap or Curve instead.

Estimated returns and source of yield

The target ROI for this strategy is 64%, but it may vary based on liquidity in the pools.

Source of yield: Mean reversion of token prices in various liquidity pools, as well as trading fees earned from the ETH/USDC pool on SushiSwap, USDT/USDC pool on UniSwap, and UDST/ETH pool on ShibaSwap.

Underlying coins and protocols

Coins: ETH, USDC, USDT

Protocols: Optimism

Strategy pros

Automation: The OU process is a fully automated strategy, which means that it can operate 24/7 without the need for human intervention, making it ideal for traders who want to minimize their workload.
Statistical accuracy: The OU process is a statistically rigorous approach to algorithmic trading that relies on mathematical models to make trading decisions, which can improve the accuracy of trading signals.

Strategy cons

Model parameters: The performance of this strategy is highly dependent on the selection of model parameters, such as the mean-reversion rate and volatility. Poor parameter selection may lead to underperformance or losses.
Market inefficiencies: While mean reversion is a widely recognized market inefficiency, it is not guaranteed to persist. The OU process strategy assumes that prices will revert to a mean, but if the underlying asset experiences a fundamental change, such as a shift in demand or supply, the strategy may fail.
Transaction costs: This strategy relies on frequent trading to capitalize on small market inefficiencies. However, frequent trading may result in higher transaction costs, which can eat into potential profits.

Fees

Performance fee: 15% of weekly profit (only if the strategy has generated profit); fees are deducted directly from the strategy shares each week.

If the user exits the investment strategy before the settlement day, then we calculate the difference between the current price and the price of the last settlement period and take 15% of the profit. If there is no profit, then the user does not pay performance fee.

Swap fee: Swap fee: 0.5% (into and out of this strategy).

Strategy address: https://debank.com/profile/0x29414ec76d79ff238e5e773322799d1c7ca2443f

Maximum capacity: $5,000,000

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