How To Arbitrage USDL for Profit (Look Out For This!!!)

In 2022, when major stablecoins like USDC, USDT, and DAI lost their pegs, numerous prominent investors seized the opportunity to increase their holdings by investing millions during the price drop.

Some simply bought and held, patiently waiting for prices to rise, while others engaged in arbitrage, buying in one location and selling in another.

For USDT, arbitrage required over 100,000 USDT and accreditation as an investor, creating a significant entry barrier. However, the Liquid Loans protocol has democratized this process, enabling anyone with a small amount of USDL to participate in redemptions.

Here’s a step-by-step guide on how to profit from arbitraging USDL.

Step #1: Identify a Price Discrepancy

A price discrepancy for USDL would technically be any value under $1.

However, there are a few things to consider:

1. Redemption Fee. If you want to redeem USDL you have to pay a fee. It is usually 0.5% but can range as high as 5%. Make sure that if you plan on using the redemption mechanism for arbitrage, you must have a cost basis below 99.5 cents to profit.
2. Gas Fees. Arbitraging USDL will require a minimum of three transactions. You must buy USDL, redeem USDL, and sell PLS back into the asset you originally held. Make sure that the expense of the gas fee does not significantly impact your margins.
3. Price Impact. Whenever you buy or sell an asset, you move the price against yourself. For example, if the price of USDL is 99.5 cents and you buy 1000 dollars worth, you might buy the first 500 dollars at 99.5 cents and the second 500 dollars at 99.6 cents. This will impact your profit margins if your order is substantial and/or the liquidity pool is thin.

Step #2: Choose a Liquidity Pool

Although arbitrage bots help with this nearly instantly, no liquidity pool has the same price for any asset.

For example, a centralized exchange may list USDL and keep its price fixed in their order books at $1. If you look on DexScreener, it might show that USDL has temporarily depegged to allow for an arbitrage opportunity. However, just because the price of the some decentralized exchanges has dipped, does not mean you will get that deal in other liquidity pools or centralized order books.

Thus, it is important to make sure you choose a liquidity pool that gets you the lowest price for USDL.

You can do this manually, but using a DEX Aggregator such as Piteas.io can help you get the best deal.

Step #3: Buy USDL

Once you have found a price discrepancy, go to the decentralized exchanges or DEX aggregator and buy USDL.

PulseX is used in this example, but go wherever you get the lowest price for USDL.

Note: Due to Price Impact during the trade, my original value of $68,200 will yield me $68,000. That’s roughly $200 and a 0.29% loss. Now, since the redemption fee is still 0.5%, I will need a price below 99.2 cents in order to profit from arbitrage.

Click “Swap”.

Then Click “Confirm Swap”.

Then Click “Confirm” inside of your wallet.

Step #4: Redeem USDL for PLS

Follow this super easy guide to redeem USDL for PLS.

Remember to take note of the redemption fee. Although it is usually 0.5%, it can be as high as 5%. If it is 5%, you will need an average cost of USDL under 95 cents in order to profit.

Step #5: Sell PLS for Your Original Asset

Since I was holding PLS before this transaction, I am left with PLS after redemption and do not need an additional transactions.

However, if you sold CST or a bridged stablecoin to buy cheap USDL, you can sell back into that asset using PulseX or another DEX.

Considerations

Remember: Just because USDL is under 1 USD does not mean you can turn a profit on it.

You must consider prince impact and slippage. That is, how much your order moves the price against yourself and how much the prices of the assets you hold move during your order.

You must also consider the redemption fees when calculating the margins of your arbitrage.

With that said, look out for USDL under 1 USD, it could be the easiest money of your life!