Arbitrage in Decentralized Exchanges

Arbitrage in decentralized exchanges is the practice of simultaneously buying and selling the same asset across different liquidity pools or platforms to profit from price discrepancies. Because decentralized exchanges operate independently and use automated market maker algorithms, prices for the same token can diverge momentarily.

An arbitrageur monitors these price differences and executes trades to buy the asset where it is cheaper and sell it where it is more expensive. This process helps align prices across the decentralized ecosystem, ensuring efficiency and consistency.

The speed of execution is critical, as bots often compete to capture these opportunities before others can. It is a foundational mechanism that maintains market equilibrium in the absence of a central order book.