Arbitrage Example

For the examples given below, which involves interaction between the value of underlying assets and current price, we work with ETH and USDT and we restrict that the price of ETH varies between $1000$ and $5000$. The examples only include call tokens. Here generating a token essentially the same as buying a token.

Case One

Supposing that the price of ETH is $3000$ and the value of underlying asset is $3500$, one has incentive sell (redeem) a token to make profit. This is due to the market price is less than the underlying value, then selling a call token will give the profit equalling to the difference between two prices.

Case Two

Suppose that the market price of ETH is $\$3500$ and our indicator price is $\$3000$. Given that the cost to produce a call token and the price of a call token in secondary market are equal, one has incentive to generate a token and sell it in the secondary market to make profit. This is due to the indicator price is less than the market price, then the intrinsic value of call token is greater than the difference between the indicator price and price floor.

Supposing that the price of ETH is $3500$ and the value of underlying asset is $3000$, one has incentive to generate a call token to make profit. This is due to the market price is higher than the underlying value, then generating it will give the profit equalling to the difference between two prices.

The investor has finite arbitraging opportunities, stablizing the the whole system as arbitraging takes place. Arbitraging strategies are exactly the opposite for put tokens.

In a volatile market and ideally, the market price of ETH moves ahead of the indicator price. This creates opportunity to arbitrage. In general price of call tokens should be positively related to price of ETH and price of put token should be negatively related to price of ETH. As the our platform stabilizes itself, the lag in time creates opportunity to arbitrage.