Arbitrage Decay

Arbitrage decay describes the phenomenon where the profitability of a specific price discrepancy between two markets or assets diminishes over time as more participants exploit the opportunity. In the cryptocurrency ecosystem, arbitrageurs constantly monitor different exchanges for price differences, executing trades to capture the spread.

As these trades are executed, the price difference narrows until it is no longer profitable to continue, essentially aligning the markets. This process is a fundamental driver of price discovery and market efficiency.

However, in emerging or illiquid markets, decay may be slow due to high transaction costs, withdrawal delays, or restricted access. Efficient markets typically experience rapid decay, leaving only the most sophisticated, low-latency traders to capture the remaining micro-margins.