Arbitrage traders make 10x returns on new DeFi platform for wrapped assets

Arbitrage traders make 10x returns on new DeFi platform for wrapped assets

January 20, 2021

A recently launched decentralized finance platform, Saddle Finance, has netted one particular trader a more than 10x return on an arbitrage trade between different permutations of synthetic Bitcoin (BTC).

According to transaction data from Etherscan, a user swapped 0.34 sBTC, Synthetix’s Bitcoin-based token, in exchange for 4.36 Wrapped Bitcoin, a custodial wrapper offered by BitGo. The trade offered an almost 13x return on investment, netting $150,000 to the trader.

Two other similar transactions were registered on the platform, as noted by the analyst Igor Igamberdiev. One transaction swapped 0.09 tBTC for 3.2 WBTC, an even higher return of 35x.

The trades were likely made possible by single-token liquidity providers. While Saddle pools allow committing only one asset into a four-sided pool, this still upsets the balance of prices for the other tokens. Given the pool’s low liquidity, major deposits of just one token suddenly made it much cheaper compared to the other three assets in the pool. Arbitrage traders were then able to capitalize on this oversight by extracting the value created by these single-side LPs. As a result, those who provided liquidity in these pools likely lost sizable amounts of money.

Saddle Finance is an automated market maker platform focusing on exchanging pegged assets, similarly to Curve Finance. It is backed by a host of particularly notable venture funds, including Framework Ventures, Polychain Capital, Electric Capital, Dragonfly Capital, Coinbase Ventures, Alameda Research and Boost VC.

This background led some to describe it as the venture capitalist equivalent of SushiSwap — a venture-backed fork of a community-launched project. Saddle does not appear to be a direct fork of Curve code, as it uses the Solidity language instead of Vyper. Nonetheless, it is using Curve’s StableSwap algorithm for its platform.

The project has been audited by OpenZeppelin, Quantstamp and CertiK. It is also adopting the guarded launch mechanism, limiting deposits and maximum swap amounts to ensure smooth functioning. While the protocol has worked as intended in this scenario, it may be meager consolation for those losing funds on these arbitrage trades.

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