Arbitrage in an RMM
External price alignment as a mechanism component.
#Alignment loop
- An external market establishes a reference price.
- The pool's marginal price diverges as price or time changes.
- An arbitrageur trades the price difference.
- Reserves move along the trading function.
- The new reserve state changes marginal price and LP inventory.
This reserve movement is how the pool follows its replicating path. Arbitrage is part of state transition, not incidental volume.
#Conditions
- A liquid external market is observable and accessible.
- Expected profit exceeds gas, fees, slippage and inventory risk.
- The pool remains numerically stable across its domain.
- The reference market is current and economically comparable.
#Failure modes
Absent arbitrage leaves reserves off path. Gaps can force abrupt rebalancing. Fees can either obstruct alignment or undercompensate liquidity. MEV changes who captures rebalancing value without guaranteeing accurate replication.
- Replicating Market Makers
Angeris, Evans and Chitra's primary paper on constructing CFMM trading functions from target payoff functions.
- Primitive rmms-py
Open-source Python simulation toolkit for covered-call RMM behavior, arbitrage and fee experiments.