Introducing Interest Rate Arbitrage to DeFi: A Revolutionary Approach

Brief Overview

• Arbitrage is possible in spot/futures markets but currently impossible in today's lending protocols for interest rate arbitrage.
• Infinity’s enterprise-grade risk management system combines token and credit risks, revolutionizing the DeFi ecosystem.
• Infinity enables rate arbitrage, allowing arbitrageurs to multiply existing TVL and rapidly expand DeFi’s total liquidity.

Interest rate arbitrage is currently unfeasible in crypto due to widespread risk-composability issues—a challenge Infinity Exchange is solving with its innovative protocol. First, let’s break down the core concepts.

What Is Arbitrage?

Arbitrage centers on earning risk-free profits by exploiting price discrepancies.

Example: Spot/Futures Markets

1. Identify Price Differences: Bitcoin trades at $24,000 on Exchange 1 and $25,000 on Exchange 2.

2. Execute Trades:

   • Buy 1 BTC on Exchange 1 for $24,000.
   • Sell 1 BTC on Exchange 2 for $25,000.
3. Profit: $1,000 risk-free (the "spread").

This process aligns prices across exchanges. However, interest rate arbitrage works differently.

Theoretical Interest Rate Arbitrage

Scenario: Aave vs. Compound

• Aave: Borrow USDC at 2%.
• Compound: Lend USDC at 7%.
• Potential Profit: 5% (7% – 2%).

Steps:

1. Borrow $10M USDC from Aave (2%).
2. Deposit $10M USDC into Compound (7%).
3. Earn $500K/year (5% spread).

The Catch: Risk (In)composability

• Aave and Compound don’t accept each other’s tokens (e.g., cUSDC or aUSDC) as collateral.
• Without cross-protocol collateralization, arbitrage fails.

Real-World Interest Rate Arbitrage with Infinity

Infinity’s protocol accepts collateral from Aave, Compound, Uniswap, and Curve, enabling true rate arbitrage:

How It Works:

1. Borrow USDC cheaply (e.g., 2% on Infinity).
2. Lend expensively (e.g., 7% on Compound).
3. Use Compound’s cUSDC as collateral on Infinity to borrow more—leveraging the loop.

Impact:

• Infinity’s rates become the market-clearing rate.
• Existing protocols (Aave/Compound) face pressure to narrow spreads or lose users.

👉 Discover how Infinity’s risk management unlocks DeFi’s next liquidity wave

FAQs

1. Why is interest rate arbitrage impossible today?

• Lending protocols lack cross-collateralization (e.g., Aave won’t accept Compound’s cUSDC).

2. How does Infinity solve this?

• Infinity’s risk engine prices and accepts complex tokens (e.g., LP positions, aTokens).

3. What’s the long-term effect on DeFi TVL?

• Arbitrage loops could multiply TVL by recycling collateral across protocols.

Conclusion

Infinity’s dual-market model and collateral flexibility will redefine DeFi’s interest rate landscape, enabling arbitrageurs to drive liquidity growth. The question isn’t if but how fast this revolution will unfold.

👉 Explore Infinity’s enterprise-grade risk solutions today

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