Arbitrage-Driven Price Rebalancing

Arbitrage-driven price rebalancing is the mechanism by which the price of an asset in a liquidity pool is kept in line with broader market prices. When the price in a pool deviates from the global market price, arbitrageurs purchase the undervalued asset or sell the overvalued asset to profit from the discrepancy.

This action shifts the reserves in the pool, pushing the pool price back toward the market price. This process is essential for the health of the decentralized exchange, as it ensures that the internal price reflects external reality.

It is a core example of behavioral game theory in action, where independent actors stabilize the system for personal gain.