BINANCE CRYPTO RESEARCH REPORT – DeFi Series #2 – Arbitrage and Carry Trade Strategies
Exploring carry trade and arbitrage strategies with Ethereum-based DeFi
September 24th 2019
- Interest rate arbitrage in the DeFi space refers to taking advantage of interest rate differences across DeFi platforms. DeFi-CeFi arbitrage also exists when there are interest rate differences between centralized and decentralized platforms.
- Conversely, carry trade strategies may be pursued, i.e., it is possible to borrow with a low-interest asset to invest in an asset yielding higher returns.
- However, all existing DeFi platforms rely on over-collateralization requirements from the borrower’s perspective, which limits potential arbitrage opportunities.
- Several potential market inefficiencies may subsist both within DeFi and with CeFi platforms, which can be explained by the following reasons:
- Nascency of the DeFi space: illustrated by low liquidity, visible on the size borrowable amounts and daily volumes transacted (relatively to CeFi).
- Platform-specific risks: interest rate volatility, potential smart-contract issues, loan matching uncertainty, redemption risks, etc.
- Different platform & protocol characteristics: all protocols and platforms, whether they are decentralized or centralized, have different expected characteristics, collateralization requirements, and terms of the agreement.
- Eventually, as the DeFi space matures, new opportunities are expected to become more scarce. Interest rates across platforms should also converge, as long as assets and platforms share similar risk characteristics. New platforms and protocols like interest rate swaps may contribute to a broader range of trading opportunities.
DeFi (Decentralized Finance) has been growing significantly since mid-2018, with Ethereumbeing one of the most prominent blockchains for platforms and developers1. This report describes trading strategies, namely arbitrage and “carry trade”, within the DeFi space and between DeFi and CeFi2 platforms. Besides, this report aims to discuss potential price inefficiencies along with risks and constraints that must be considered when building these advanced positions.
READ THE FULL REPORT HERE
24.09.2019 - 21:23
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