Risk Free Profits — On SteakBank (Arbitraging)
There are many ways to get a return on your investments, and one of the best ways to do so is by taking advantage of a price difference between two or more markets, and striking a combination of matching deals that capitalize upon the imbalance. The profit comes from the difference between the market prices at which the unit is traded. People in finance call this arbitrage.
Why does arbitrage exist ?
Arbitrage exists because there are multiple markets, each with different levels of supply and demand. Take Bitcoin for example which when traded against korean won (KRW) is often done at a premium which can be as high as ~20% when compared to other currencies. This is known as the kimchi premium.
People are able to buy BTC for a lower price with a fiat pair like USD or EUR from one exchange, transfer it to a korean exchange and then sell it off at a higher price in KRW. They can then convert their Won back into USD, and buy BTC at a cheaper price, completing a whole cycle.
Arbitrageurs can keep doing this and earn a profit until the price of the assets reaches an equilibrium. The reason why such an action would cause the price to converge is due to the increasing buying pressure at the cheaper exchange, and the constant selling pressure at the exchange with the premium price.
These same opportunities can also take place in SteakBank, provided users know where and how to look for them, and to do that, one needs to understand what LBNB is, how it’s being priced, and what the right price of LBNB is.
Where to find them.
The Basics — What should the right price for LBNB be ?
One has to understand SteakBank’s pegging mechanism before knowing where to look. At SteakBank, a user can stake BNBand, in return, receive a minted LBNB token. However, most of the time, when a user stakes BNB, he will not get the equivalent amount of LBNB, but he will receive an equal value of LBNB because the LBNB tokens are often priced at a higher price than BNB.
The reason for the aforementioned discrepancy is that when BNB is staked to be used for validation, the validation rewards will be paid back in BNB, and reflected in LBNB.
Example:
Initial Pool = 0 BNB.
Validator yield = 30% Annual Returns
Price of BNB = $1
User A puts in 1 BNB in the pool and receives 1 LBNB.
(Pool has 1 BNB now, and minted 1 LBNB to User A)
1 year later, the Pool has received an additional reward of 0.3 BNB due to validating, and additionally with it’s 1BNB in the pool, it has now a total of 1.3 BNB in the pool. That would be equivalent to $1.3 dollars. As user A is now able to use his 1 LBNB to claim back 1.3 BNB, the correct price of LBNB would be $1.3.
Where to look, and how to execute.
Understanding the above pricing model, one can then look for pricing disparity, and take advantage of the arbitrage opportunities on SteakBank. Since we know that one of the most important variables is the ratio of BNB in the pool to the number of total LBNB minted, we can use this information to know where can we find these opportunities. Find out below.
In the current version, users can find the ratio on our DApp once they connect their wallet.
Why would pricing disparity happen? It could happen because there is a sudden surge of demand of LBNB, or there are a lot of people looking to unstake LBNB into BNB
Note: Most of the time, 1 LBNB will be exchangeable for > 1 BNB due to the additional validator rewards.
E.g 1 LBNB = 1.0057 BNB.
So what would happen if :
Case 1:
The pool ratio of 1LBNB = 1.0057 BNB, but the price of each LBNB is > than 1.0057 BNB’s price ?
This would mean that there is more buying pressure on LBNB then it should, and means that LBNB is currently priced at a premium. This can be very simply arbitraged by using a stablecoin to buy up BNB in the spot market, minting the BNB token on SteakBank to get LBNB and then selling the LBNB on our BNB/LBNB pool.
Case 2:
The pool ratio of 1LBNB = 1.0057 BNB, but the price of each LBNB is < than 1.0057 BNB’s price?
This would mean that there is more selling pressure on LBNB then it should, and means that LBNB is currently priced at a discount. This can be solved by buying up LBNB and immediately redeeming the LBNB for BNB to get back more BNB than what was being staked.
(It’s worth noting that due to the limit of redemption time, which can vary between the next 1 to 7 days, this also means the opportunity for closing this arbitrage will have the same timeframe )
This should only happen on very rare occasions, such as when users would like to liquidate their LBNB to BNB very quickly during high volatility events like high-pressure sell offs. However, another way to look at it is that, for users who are long BNB, there is a good opportunity to grab LBNB ( A yield generating BNB token which can be converted into BNB) at a discount.
Executing the arbitrage
For the newcomers, we will also be releasing an additional step-by-step guide to arbitrage. So keep an eye out for this upcoming guide while you season your stakes!
About SteakBank
SteakBank is a Binance Smart Chain (BSC) liquid staking platform. It allows derivative tokens to be issued on the BSC blockchain through the BEP20 standard. These representative tokens can then be used for liquidity farming or as collateral for decentralized lending, enabling users to earn multiple income streams from one single asset.
A simple yet powerful project, SteakBank aims to solve the liquidity issue found in the current DeFi sector. Currently, when users stake with validator, their tokens are locked up and unable to be used for other yield generation purposes such as liquidity providing, or lending. SteakBank is able to solve this problem and improve user’s capital efficiency.
Steakbank not only benefits token holders and project ecosystems by optimizing capital efficiency but also allows the communities to earn additional income without the need for further token allocation.
Steakbanks’ native token, SBF, will also be rewarded when users stake their liquid token in SteakBank’s liquidity pool.
