The Opportunity
In this segment of our documents, we examine the market size of value extracted from volatility as we traverse how our solution stands to capitalize on this market opportunity.
Last updated
In this segment of our documents, we examine the market size of value extracted from volatility as we traverse how our solution stands to capitalize on this market opportunity.
Last updated
Market Opportunity Size
Assessing the magnitude of the arbitrage market presents significant challenges due to various factors
Multiple Blockchain Networks: Different blockchain networks support liquidity, leading to a vast amount of data to analyze.
On-Chain vs. Off-Chain Arbitrage: While atomic arbitrage can be quantified on-chain, much arbitrage occurs between CeFi (Centralized Finance) and DeFi (Decentralized Finance), where off-chain settlement makes quantification impossible.
Validators and Block Builders: Each blockchain has its own set of validators and block builders, some with publically available data, others with data that isnt so public or easy to scrape. This further complicates quantification efforts.
Despite these challenges, insights can be gleaned by examining a segment of the market. For instance, the value extracted from arbitrage within the Flashbots ecosystem on Ethereum provides a case study. Flashbots, one of Ethereum's major block builders, reported approximately $73,000,000 in value extracted by validators post-merge. Assuming similar data from the other two major block builders, we estimate a total value of roughly $219,000,000 extracted from volatility on Ethereum alone.
Examining Binance Smart Chain (BSC) using block builder data retrieved from Eigen Phi, we observe that over the past 30 days, validators have benefited to the tune of almost $22 million in value extracted from arbitrage. Even though this constitutes only a fraction of the value actually extracted due to data fragmentation, extrapolating an annualized average suggests that a minimum of $264 million in value is extracted from BSC each year.
This presents a monumental opportunity for our ecosystem to capitalize on, potentially cornering the market in the process.
From May 2023 - May 2024, data presented from the LIB MEV dashboard that $150 million has been extracted from volatility farming on the Ethereum network. This concept, which our protocol intends to capitalize on, is still underexplored and holds substantial market potential.
Opportunity Breakdown: Of the $150 million reported, only a fraction of arbitrage profits are extracted by the arbitrager—$19 million or 12.66% to be exact. This is due to the wastage inherent in the arbitrage process due to "Public Order Flow," leading to Priority Gas Auctions (PGAs).
Priority Gas Auctions (PGAs): Due to the public nature of blockchain transactions, arbitrage opportunities are inherently public. This leads to a bidding war for block space to process transactions like arbitrage opportunities. Arbitragers pay excessive gas fees to snipe the arbitrage trade before others, significantly reducing their profits.
Data Fragmentation: The reported figures are incomplete, representing only on-chain (atomic) arbitrage. Research presented by Frontier Tech indicates that 60% of arbitrage opportunities (by revenue) occur via CeFi-DeFi arbitrage, which involves off-chain components and remains difficult to quantify accurately.
Impact on Liquidity Providers (LPs): The current process directly impacts LP participants by devaluing their positions and leading to a loss of pooled assets. This lost value is extracted by opportunists in the MEV and arbitrage landscape.
Inefficiency in Value Extraction: The current system is highly inefficient, with over 80% of value being handed to block builders and validators due to PGAs.
Market Size: The $150 million figure represents a fraction of the actual market size. Considering the fragmented data and the exclusion of CeFi-DeFi arbitrage, the true market opportunity on the Ethereum chain alone might well exceed $1 billion annually.
Optimization of this process could involve extracting the value lost by LPs and returning it to a purpose-built ecosystem aimed at solving the "Liquidity Problem" in DeFi.
Privatize Order Flow: To eliminate competition and circumvent PGAs.
Compose Purpose-Built Indexes: To act as counter liquidity.
Engage Trading Engine: As the sole entity permitted to interact with private index pools.
Identify Price Deviations: On external liquidity sources caused by volatility.
Enhance Value Extraction: By over 80%.
Arbitrage External Liquidity: And return the lost value back to our ecosystem.
The choice is evident: arbitrage your own liquidity with Private Pools Network, or someone else will. Monetize the value you lose daily or continue allowing your liquidity positions to be depleted by other actors.
