Introduction
Arbitrage is a trading strategy in which a trader simultaneously buys and sells an asset in different markets to take advantage of a price difference to generate a profit. Arbitrage trading is in important activity for every exchange. Due to arbitragers, exchanges are able to provide high liquidity, offer low spreads and in case of futures exchange converge market price to underlying asset price. Being a futures exchange, Tsunami introduces some new opportunities for arbitrage trading on Waves blockchain.
Spot / Futures arbitrage
Imagine an asset price is different on Spot (say swop.fi, puzzleswap.org or waves.exchange) and tsunami.exchange. Say, Waves price is 4.5 on Spot (best buy) and 4.7 on Tsunami. We can buy Waves on Spot (effectively creating x1 leveraged long position on spot market) and go short with same position size and x1 leverage on Tsunami.
Now, the most likely scenario is price convergence. Since Tsunami is designed in such a way, that funding payments incentivize traders to converge market price to index price, the futures price will most likely converge to market (4.7 → 4.5) earning profit on short position.
Alternatively, since futures price are capturing trader's expectations on future price on the asset, there is a high probability that a spot price may go up, so the prices will converge in the middle, earning the trader a profit on both positions.
In other cases this position is delta-neutral, as synchronous price movements, say down on Spot and down on Tsunami will result in net 0 gain instead of loss - price losses on spot long will be offset by gains on futures short and vice-versa.
Futures / Future arbitrage
Even more arbitrage opportunities arises when arbitraging between multiple futures exchanges, such as Binance futures or FTX and tsunami. When a price on a 3-rd party futures exchange is higher than on Tsunami, you may open short on a 3-rd party exchange and long on Tsunami.
The trade should be closed when prices on both exchange converge to a some extent, earning the arbitrager a profit. If prices follow the same direction, traders position remain market - neutral, earning him net-zero.
Then only difference with spot arbitrage trading, is that you may open both short and long on a 3-rd party exchange. You may also use leverage to further increase your gains, just make sure that you use the same leverage on both exchanges.
Funding sniping
Every hour, Tsunami is exchanging funding between short and long. If the contract price is above the spot price, longs will pay shorts. If the contract price is below the spot price, shorts will pay longs. The size of the funding payment is a function of the difference between the contract price and the spot price, as well as your position size. This incentivizes traders to take the unpopular side of the market.
How much you will earn on funding you may know from Tsunami UI.
If a funding rate is positive, it’s displayed in green. This means that opening a position on this direction will earn you a funding, and choosing the opposite will result in you paying the funding.
Since the market price on Tsunami currently lags the index price, it offers significant Alpha to converge the spread. Opening a position in a converging direction have the following advantages:
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you will earn funding
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price will most likely follow due to natural market conditions
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other arbitragers/trades will likely want to earn funding as well, so they will open a position in the same direction, providing you with profit on price change.