Arbitrage-Driven Price Distortion

This happens when the activities of arbitrageurs cause prices to deviate from their true value due to latency or market depth constraints. While arbitrage aims for efficiency, the speed and volume of automated bots can lead to temporary, extreme price movements.

These distortions can trigger unintended liquidations or other adverse effects in sensitive financial protocols. It is a consequence of high-frequency trading dynamics in the crypto market.

Recognizing this risk is vital for protocol design.