Arbitrage Incentive Failure

Arbitrage incentive failure occurs when the mechanisms designed to keep a token's price pegged to its underlying asset cease to function effectively. This happens when the cost of executing an arbitrage trade ⎊ such as gas fees, slippage, or time delays ⎊ exceeds the profit available from the price difference.

When arbitrageurs are no longer incentivized to correct the price, the wrapped token can drift far from its intended value. This failure is often a symptom of low liquidity or blocked redemption paths within the protocol.

A healthy ecosystem requires high liquidity and efficient, low-cost execution for arbitrageurs to maintain market stability.