Advanced Theory

Arbitrage Principle

To run a good scheme, first be a good arbitrageur

+-----------------------------------------------------------+
|                   ARBITRAGE PRINCIPLE                      |
+-----------------------------------------------------------+
|                                                           |
|   Unless you're Jobs or Huang Renxun                      |
|   rewriting the rules of value creation...                |
|                                                           |
|   You're just moving bricks of already-created value      |
|                                                           |
|   That's arbitrage                                        |
|                                                           |
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1/ Arbitrage is Everywhere

  • Trade is geographic arbitrage
  • Banks are cognitive arbitrage on depositors
  • North Indian internet is regulatory arbitrage on firewalls

Most great "business innovations" on this planet, including Crypto, are based on arbitrage

Arbitrageable profit comes from "asymmetry." Where there's "profit" there's liquidity, and liquidity is our father.


2/ Three Elements of Arbitrage

When identifying arbitrage opportunities, consider three elements:

ElementQuestion
Arbitrage SourceWhose profit am I capturing?
Rules and AsymmetryWhat kind of profit?
Arbitrage SpaceHow large is the asymmetry?

3/ Case Study: Hyperliquid

Arbitrage Source: Fees contributed by traders who need licensed CFD platforms + can't be served by large offshore CEXs due to compliance + don't trust small exchanges

Rules and Asymmetry: Crypto perpetual demand is a certainty, but CEXs or CFD platforms that can provide this service are either untrusted or constrained by regulation

Arbitrage Space: Global crypto perpetual demand - trading volume that compliance-bound CEXs can provide

Hyperliquid's arbitrage core is packaging a centralized perpetual exchange as a chain, forming "regulatory arbitrage"


4/ Deep Arbitrage: Gambling

What you think gambling is:
└── Using Kelly criterion, profit from cognitive gaps caused by gamblers' cognition and addiction

What gambling actually is:
└── Money needing laundering rushes in as betting capital
└── Left hand loses to right hand, dirty money in, clean money out
└── The latter is 100x larger than the former

Arbitrage Analysis:

  • Arbitrage Source: Attrition and rake paid by flows needing to pass through casinos
  • Rules and Asymmetry: Other industries can't accommodate similar flows due to regulation
  • Arbitrage Space: Total flow of this demand - flow that other dual-price industries can handle

5/ Arbitrage is the Best Narrative

Arbitrage logic is not only good business, but also a good story.

The larger the arbitrage scenario and space, the more valuable the narrative.

The most powerful narratives in crypto history are almost all arbitrage narratives:

  • BTC mining energy arbitrage
  • Plustoken "brick moving arbitrage"
  • USDE delta-neutral arbitrage
  • Binance Alpha airdrop farming

The most understandable and self-consistent story spreads best, and the best-spreading story is the best story


6/ Liquidity Arbitrage: USDE Model

Crypto has only two scarce resources: liquidity and screen time

The same arbitrage scenario in the same space-time has limited capacity. Occupying the absolute majority in limited arbitrage space will inevitably attract maximum liquidity.

Therefore must issue as stablecoin:

A strategy with 1x market capacity, issued as stablecoin can:

  • Find lending protocol as 60% LTV collateral (3x leverage)
  • Add Pendle PT/YT (4x)
  • Use as asset issuance split ponzi collateral or nested as JLP
  • Add some yield boost for another 10x

Directly reach 100x leverage


7/ Screen Time Arbitrage: Pump & Sidekick

People only have 24 hours a day. Minus sleep, maximum screen time is 17 hours.

From maximizing screen time perspective, earning money and dopamine must merge into one.

Since time is limited, any POW is inefficient. Only one way: gambling, and maximum leverage gambling


8/ Pump's Revolutionary Nature

Why do all those claiming "better fair launch launchpad" narratives fail against Pump?

Because those who don't understand Pump aren't even on the same plane

What Pump does is:
└── Turn mass social media that originally occupied user screen time
└── Into the dealer for asset issuance
└── Make every minute you spend on screen
└── Become a launch with built-in 100x leverage

Today's dog traders use every minute they previously spent scrolling Twitter on CA verification angles.

This is entertainment + earning + time three-in-one


Core Formula

Arbitrage Value = Asymmetry Degree × Arbitrage Space × Leverage Multiple

Three Arbitrage Questions:
├── Whose profit?
├── What profit?
└── How large is the space?

Whether you're running a scheme or building a real project:
└── Recognize early that you're unlikely to be a groundbreaking pioneer
└── More likely an arbitrageur with uncertain prospects
└── Design a system that can leverage as much as possible

Can't answer these three questions? Give up early

Next: GambleFi Theory