Sudoswap is enabling NFT Arbitrage between marketplaces since it provides immediate liquidity for NFT sales.
While this isn’t strictly new, an NFT trader known by the pseudonym Lorem documented, on Oct. 20, their path to arbitraging NFTs, and how it has become a crowded trade. They also provided details of the challenges of fighting against sandwich attacks to carry out these types of trades. In total, this trader made 7 ETH ($9,000) in just over a month, showing the value in this new type of arbitrage — one that may grow over time as more financial tools crop up for NFTs.
“While I’ve been interested and searching for arbitrages for over a year now this was by far the most profitable strategy I’ve come up with, and quite frankly the strategy itself isn’t that complex,” said Lorem in a blog post.
Solving the NFT liquidity problem
Arbitrage is where a trader buys an asset on one marketplace and sells it on another at a higher price — taking advantage of a price discrepancy between the two marketplaces. Typically, this is done for highly liquid assets, like stocks or cryptocurrencies, where the trades can be done simultaneously.
The challenge with NFTs is that the markets are illiquid. NFTs can take days or weeks to sell (if ever). This means an arbitrageur might know they can buy the NFT cheaply on one marketplace and put it up for sale on another marketplace where sales are typically higher — but they don’t know if the token will actually sell. This makes it a risky trade.
Sudoswap changes this by providing immediate liquidity. It works more like an exchange, where there are pools of NFTs available to buy. The NFTs are priced on a bonding curve — similar to Uniswap — where the more NFTs are bought, the higher their prices go. What it means is that traders can instantly sell their NFTs at the price available.
“The overall strategy for this arbitrage is to find NFTs on other marketplaces that can be bought for less than what the sell price is listed as on Sudoswap, and immediately sell the NFT into a Sudoswap pool,” said Lorem.
Facing threats from sandwich attacks
Lorem found that while the strategy worked, he initially faced problems from sandwich attacks — where an MEV bot sees the profitable transaction when it’s broadcast to the network and uses clever techniques to steal the transaction for itself (to the profit of the person running the bot). This surprised Lorem because the amounts were initially quite low.
“I suspected that this may happen but I figured if the profit was low the miners wouldn’t bother, but I quickly learned that they are willing to take any profit if possible,” he said.
Sandwiching is the most common form of MEV trading. It comprises the majority of the MEV volume, according to The Block’s Data Dashboard. Typically, these types of attacks see around $300 million to $400 million in volume per day.
To solve this problem, Lorem used Flashbots, a costly but effective service that lets users get transactions put into blocks in a much more direct way. In one case, Lorem paid 0.3 ETH ($390) to use this service — money that ends up going to the validator that processes the transaction — in order to net a 2.7 ETH ($3,480) gain.
After a month of doing this strategy, Lorem found the competition had grown to be much stronger. Other arbitrageurs had noticed the opportunity and were competing for the same traders. He said, “Eventually I decided that I was more than satisfied with the profit I’d made, so I called it quits.”
Yet, this may be the beginning of a more efficient and liquid NFT market — although that won’t necessarily stop NFT prices from continuing to slide.
© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
