In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets. For the following example let’s assume that you hold 50,000 STA which currently has a price of $0.10 (for $5,000 total), and wSTA has a price of $0.106:
- Wrap 50,000 STA
Trade 49,500 wSTA for 52,470 STA on Uniswap
- 500 STA is burned
- You receive 49,500 wSTA (worth $5,247)
- 524.7 STA is burned
- You receive 51,945.3 STA
Due to the purchase of STA and the selling of wSTA, this trade closes the price spread. After the trade, STA is worth $0.103 and wSTA is $0.10403
By taking advantage of the price difference between STA and wSTA you are able to increase your Statera holding from 50,000 ($5,000) to 51,945.3 ($5,350.37), even though you have burned 1,024.7 STA in the process.
The balancer pools constantly buy and sell wSTA as the relative asset prices in the pools fluctuate, causing these arbitrage opportunities to arise - the same principles apply if wSTA falls in relative value to STA. As demonstrated above, this results in higher volume, deflation, and fees paid to liquidity providers.