⚖️Liquidity Pool Arbitrage

The wide range of DeFi platforms that have emerged in recent years has caused the whole market to suffer from the same issues that their centralized counterparts do, namely fragmentation and inefficient price formation. At the same time, all of these differences provide traders with fertile ground, as they offer numerous opportunities for arbitrage trading.

Project Daylight will employ its own arbitrage system that is whitelisted and exempted from taxation in order to arbitrage its own liquidity pools and reinvest the profit made completely back into liquidity and the token contract for prolonged sustainability and residual backing asset value appreciation.

Our method, which is one of the simplest methods of arbitrage, takes advantage of the short-lived differences in rates during swaps in liquidity pools on a single platform - in this case, Project Daylight. When the protocol detects that the borrowing APR of one asset is lower than the supply APR of another, we can borrow the former against the latter and profit.

Since our native liquidity pools will be on the BNB Chain, we are able to easily make a profit using arbitraging our own LPs and reinvesting it back into liquidity, ensuring we build a solid stable backing liquidity over time. A portion of what is arbitraged also goes towards the collateralized assets supporting the floor price, thus increasing the floor price of the token passively.

MEV Bots for Arbitrage

Maximal Extractable Value, or MEV, is a practice in which crypto miners, network validators, and bot operators manipulate the order of blockchain transactions to profit through arbitrage.

In cryptocurrency, transactions are submitted to the mempool, which is mostly open to the public, for inclusion in the next block. This means that traders can see pending transactions in the mempool and predict the consequences once they are finalized on-chain.

Once the protocol identifies a transaction that may result in an arbitrage opportunity when it arrives on-chain, we can automate two transactions that will complete the arbitrage opportunity directly into the mempool or to the MEV bots' private relay as a bundle. If done correctly, the mempool transaction that generates the opportunity, as well as our two transactions, will be mined in the same block. As a result, the arbitrage opportunity is completed at the same time as the next two transactions we execute.

We can arbitrage between the two because ORION DEX has a liquidity pool with the same token pair. Using our smart contract script, Project Daylight can then detect a pending swap on ORION in the mempool and find the same liquidity pool on our DEX. We can then provide the aforementioned information to our smart contract in order to evaluate an arbitrage opportunity.

Because liquidity pools are provided by users on our DEX, there is no guarantee on the scale of funds, implying a lack of liquidity and market depth. As a result, our MEV bots can profit from the arbitrage opportunity created by large buy/sell order fluctuations. When a large purchase order is discovered, the MEV bot can pay a significant transaction fee to purchase at a lower price ahead of a buyer, then sell it to the target buyer at a higher price. This procedure results in a front-running arbitrage. When there is a large sell order, the process can back-run it to generate arbitrage profits via a short. MEV back-running arbitrage is the name given to this process.

A portion of the profits from the arbitrages on our DEX will be directly reinvested back into liquidity, as our smart contracts are designed to automatically send the revenue MEV bots make directly into the multi-sig liquidity vault. The remainder of the profits are fed to the token contract, to permanently raise the floor price in perpetuity, ensuring it can never fall.