Arbitrage and Market Efficiency

11.1 The Role of Arbitrage

AMM pools price assets based on their internal reserve ratios. When external market prices diverge from pool prices, due to directional trading flow, news events, or liquidity changes on other venues, the pool price drifts from fair value.

Arbitrageurs are traders (typically automated bots) who exploit price discrepancies between venues. When SwapBlok's wETH/wBTC pool trades below the Binance BTC/ETH market price, an arbitrageur buys wETH from the SwapBlok pool and simultaneously sells ETH on Binance, profiting from the gap and in the process restoring the SwapBlok pool price to parity with the market.

Every arbitrage trade pays the full SwapBlok fee schedule: up to 0.20% market fee to the SwapBlok treasury and 0.20% pool taker fee to LPs. Arbitrage bots often generate a significant majority of total DEX volume; they are a primary revenue source, not a problem to be prevented.

11.2 SwapBlok Liquidity Operations

At launch, SwapBlok seeds all pools with initial liquidity from its treasury and operates primary arbitrage and inventory management bots.

Arbitrage bot operation:

• Connects to SB Chain node via WebSocket API (get_ticker, get_liquidity_pools_by_both_assets)
• Monitors all pool prices against external market references (Binance, Coinbase APIs)
• Executes when price gap exceeds fee cost plus minimum profit threshold
• All market fees paid by the bot flow back to SwapBlok as asset issuer (net zero cost)

Inventory management:

• Monitors pool balance ratios; triggers rebalancing when one side falls below a threshold
• Sources imbalanced assets from external centralised exchanges (Binance, Kraken)
• Bridges assets onto SB Chain via sBridge
• Deposits back into pool to restore target ratio

SwapBlok publishes the wallet addresses of its operational bots publicly. All bot trades are on-chain and auditable. This provides complete transparency and eliminates any suggestion that SwapBlok is trading against its users.

11.3 External Market Maker Integration

SB Chain's public WebSocket API exposes all pool prices, balances, and trade history. External market making firms and arbitrage bots can connect to any public node and access this data with no permission or registration required.

As exchange volume grows, professional market makers will integrate SwapBlok organically; the profit opportunity is self-advertising. SwapBlok's role transitions from sole market maker to one participant among many over the first several months of operation.