BASE — Arbitrage Opportunities
BASE is a token whose price is pegged to the total market cap of all cryptocurrencies at a ratio of 1 : 1 trillion. BASE allows traders to speculate on the entire crypto industry with one token.
If crypto market cap is $350B, BASE is $0.35.
If crypto market cap is $700B, BASE is $0.70.
This price peg is achieved through an elastic supply protocol, which programmatically expands/contracts token supply to achieve target price equilibrium.
These supply adjustments affect the scarcity of BASE, which influences market actors to drive price back to the target peg.
In this article, we’ll explain how these supply adjustments work and how they create arbitrage opportunities for BASE holders.
Elastic Supply
BASE is a synthetic asset that functions to reflect the “price” of all cryptocurrencies. BASE derives its target price (tp) directly from the total market cap of all cryptocurrencies (cmc) at a rate of 1 : 1 trillion, or cmc x 0.1¹² :
- tp = cmc x 0.1¹²
- If cmc = $400,000,000,000
- Then tp = 400,000,000,000 x 0.1¹²
- target price is $0.40.
The Base Protocol functions to ensure that BASE market price (mp) is equal to target price (tp).
When market price (mp) = target price (tp) BASE is in a state of equilibrium.
Its price perfectly reflects cmc.
When market price (mp) ≠ target price (tp) BASE is in a state of disruption.
Its price does not perfectly reflect cmc.
When BASE is in a state of disruption, where its market price does not perfectly reflect total market cap of all cryptocurrencies, it must reconcile to reach a state of equilibrium. This is achieved through programmatic expansion / contraction of the total BASE supply, made possible through an elastic supply protocol.
These supply expansions or contractions are called rebases.
Rebasing
At the highest level, the Base Protocol exists to do one thing: correlate BASE price with total crypto market cap. This is achieved by adjusting BASE supply until its market price (mp) reaches its target price (tp), the price where BASE is at equilibrium with total crypto market cap.
Consider this example, where tp = $1:
t1 : Starting Equilibrium
John has 1 BASE worth $1.
t2 : Price Increases
John has 1 BASE worth $2.
t3 : Ending Equilibrium
John has 2 BASE each worth $1.
At t1, John starts with a balance (supply) of 1 BASE with a market price of $1.
At t2, the market price of BASE goes up to $2. But remember, its target price is $1.
*at t2, price equilibrium is disrupted and must be resolved through a rebase event.
At t3, the rebase event occurs. The total supply of BASE is adjusted in proportion to the difference between market price and target price.
By adjusting supply, the rebase drives market price down, pegging it back to its $1 target.
The rebase makes no difference in John’s net balance. Whether he holds 1 BASE worth $2 or 2 BASE each worth $1, his net $ balance and percent ownership of total supply remains constant.
The example above illustrates the long-term intention of rebasing, which is to correct price by adjusting supply. However, rebasing cannot directly correct price as modelled in the example.
Rebasing can only influence price corrections.
Market actors must respond to rebases for price to correct.
This is where BASE arbitrage opportunities are created.
Arbitrage Opportunities
At a more granular level, rebases create profitable arbitrage opportunities that motivate holders to sell following expansions and speculators to buy following contractions.
BASE Expansion Arbitrage
Consider this example, where supply expands:
t1 : Starting Equilibrium
John has 1 BASE worth $1/BASE. [net balance: $1]
t2 : Price Increases
John has 1 BASE worth $2/BASE. [net balance: $2]
t3 : Expansion Occurs
John has 2 BASE worth $2/BASE. [net balance: $4]
t4 : Ending Equilibrium
John has 2 BASE worth $1/BASE. [net balance: $2]
In this example, there is a lag between the rebase at t3 and the downward price correction at t4. If John acts quickly during this lag period, he could sell 2 BASE at $2 each for a total of $4.
In other words, he has a chance to sell more BASE at t3 than he could have at t2 for the same higher price.
This arbitrage opportunity incentives John and other holders to sell as soon as possible.
As holders sell in this window, price corrects back down to its target while supply retains its increase.
BASE Contraction Arbitrage
Consider this example, where supply contracts:
t1: Starting Equilibrium
John has 1 BASE worth $1/BASE. [net balance: $1]
t2: Price Decreases
John has 1 BASE worth $0.50/BASE. [net balance: $0.50]
t3: Contraction Occurs
John has 0.5 BASE worth $0.50/BASE. [net balance: $0.25]
t4: Ending Equilibrium
John has 0.5 BASE worth $1/BASE. [net balance: $0.50]
In this example, there is a lag between the rebase at t3 and the upward price correction at t4. If buyers act quickly during this lag period, they could purchase a greater share of the network.
Before this rebase, 1 token may have represented 1% of the network; after the rebase, 1 token would represent 2% of the network. In other words, buyers have a chance to purchase a greater network percentage at t3 than they could have a t2 for the same lower price.
As speculators buy in this window, price corrects back up to its target while supply maintains its decrease.
BASE Dashboard for Arbitrage
Fast acting BASE traders can realize profits through these arbitrage windows, immediately following rebases. The BASE Dashboard exists to make BASE arbitrage simple and easy for everyone. We encourage BASE holders to pay attention to the dashboard and act quickly on these windows.
See the BASE Dashboard here: dashboard.baseprotocol.org
Rebases — and the arbitrage opportunities they create — are the leash which yanks BASE market price back to target price equilibrium. These arbitrage windows are a baked in “profit feature” for BASE holders.
