An on-chain analyst named Lookonchain recently outlined a profitable arbitrage strategy used by an Ethereum whale involving staked ETH (stETH).
1/ This whale has been doing arbitrage with ETH/stETH.
Let’s take a look at his strategy and see how much money he makes. pic.twitter.com/HtsgdiNb8i
— Lookonchain (@lookonchain) October 9, 2023
According to @lookonchain, the whale exchanges ETH for stETH on a DEX at a slight premium and then redeems the stETH 1:1 for ETH via Lido. This allows the whale to pocket the spread between the ETH and STETH prices.
For example, the whale swapped 1,370 ETH for 1,370.3351 stETH on 1inch, paying 0.0061 ETH ($10) in gas fees. Redeeming the stETH for ETH netted a profit of 0.329 ETH ($540).
While not a huge return for a single trade, doing this daily with 1,370 ETH would generate 118 ETH ($194,000) in annual profit. That translates to an 8.6% APY based on arbitraging the ETH/stETH peg.
The trader can amplify returns when ETH/stETH depegs further. In May 2022, the ratio dropped to 0.94, allowing for $87 in profit per 1,370 ETH trade.
The arbitrage strategy is deemed unsuitable for those with limited funds due to the associated transaction costs. This approach appears to be tailored for whales—large-scale investors who can afford the hefty fees.
Arbitrage is a widely used trading strategy across different financial markets, including the cryptocurrency sector. This approach capitalizes on price variations for the same asset on various platforms or exchanges. In essence, it involves purchasing an asset at a lower price on one platform and selling it at a higher price on another, thereby generating profit from the price differential.
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