Arbitrage Spread Efficiency

Arbitrage Spread Efficiency measures how quickly and accurately arbitrageurs close the price gap between a decentralized pool and external market venues. In an efficient market, the price in the pool should closely track the global market price.

If a gap emerges, arbitrageurs buy the underpriced asset or sell the overpriced one, profiting from the spread and restoring the peg. The efficiency of this process depends on gas costs, execution speed, and the liquidity of the venues involved.

When spreads remain wide for extended periods, it indicates market inefficiency or high friction, which can lead to further instability. Efficient arbitrage is the primary mechanism for maintaining price parity in decentralized finance, acting as the market's self-correcting force.