Arbitrage Profit for Constant Product AMM

Uniswap V3
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Table of Contents

1. About The Project
   • Built With
2. Getting Started
   • Prerequisites
   • Installation
3. Usage
4. Simple Arbitrage Contract
5. Arbitrage Profit For CPAMM
6. Test Arbitrage
7. Forking mainnet
8. Note
9. Roadmap
10. Contributing
11. License
12. Contact
13. Acknowledgments

About The Project

Arbitrage between USDC/ETH 0.3% fee pool and USDC/ETH 0.05% fee pool

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Built With

• 
• 

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Getting Started

To get a local copy up and running follow these simple example steps.

Prerequisites

• npm

  npm init -y

• hardhat

  npm install --save-dev hardhat

  run:

  npx hardhat

  verify:

  npx hardhat verify --network goerli "contract address" "pair address"

Installation

1. Clone the repo

   git clone https://github.com/Aboudoc/Uniswap-V3-Arbitrage.git

2. Install NPM packages

   npm install

3. Dependencies

   npm add @uniswap/v3-periphery @uniswap/v3-core
   npm add --save-dev dotenv

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Usage

If you need testnet funds, use the Alchemy testnet faucet.

This project shows a simple arbitrage strategy

You can find a deep overview of Uniswap v3 in this repo

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Simple Arbitrage Contract

In this arbitrage example we will:

1. Borrow USDC from one pool

2. Swap USDC back to WETH in another pool

3. Repay first pool with WETH

   If the amount of WETH bought back in step 2 is greater than the amount repaid in step 3, then there is profit from the the arbitrage. Otherwise there was a loss.

Function flashSwap

This function will start the arbitrage by borrowing USDC from pool0. pool0 will send USDC to this contract and then call uniswapV3SwapCallback

Inside uniswapV3Callback, we will need to send wethAmountIn amount of WETH to pool0.

1. Encode data to be later decoded inside uniswapV3SwapCallback. The data to encode are msg.sender, pool0 and fee1.

2. Initiate the arbitrage by calling IUniswapV3Pool.swap on pool0. Below are the inputs to pass.

   recipient: Address to receive output token

   zeroForOne: Direction of the swap, true for token0 to token1

   amountSpecified: Amount to swap

   sqrtPriceLimitX96: Limit for the change in price

   data: Data to be passed to uniswapV3SwapCallback

Function _flash

Swap tokenIn for tokenOut by calling router.exactInputSingle

1. Approve amountIn
2. Prepare params
3. Call exactInputSingle on router and store amountOut

This function returns amountOut

Function uniswapV3SwapCallback

This function is called by pool0 immediately after we call IUniswapV3Pool.swap.

amount0 is amount of USDC we borrowed. This variable will be a negative number since USDC is taken out of the pool.

amount1 is amount of WETH we owe to pool0.

data is the data we've encoded inside the function flashSwap.

1. Decode data
2. msg.sendermust be pool0
3. Store amount0 and amount1 as usdcAmountOut and wethAmountIn
4. Call _swap to swap USDC for WETH and store wethAmountOut
5. Repay WETH back to pool0. If there is profit, transfer to caller. Otherwise transfer the loss from caller.

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Arbitrage Profit For CPAMM

let's see some equations related to the arbitrage profit for a constant product AMM

First, assume that a CEX has infinite liquidity

The AMM has token X and token Y, and the price P = Y / X

On the CEX the price is lower, p - dp

An arbitrageur can make a profit: The difference in the token Y that he sold on the CEX and then got back from the AMM is the profit A

The green line represents the current price of the AMM. There are X0 amount of token X and Y0 amount of token Y => P = Y0 / X0

On the CEX (red line), the price is quoted as P - dp

The trade in purple will lower the price for P to P - dp. But before the arbitrageur can execute this trade, he first has to get dx amount of token X.

To do that, the arbitrageur will go to the CEX and then sell dy0 amount of token Y to get dx amount of token X. Next he will go to AMM and sell this exact amount of token X to get back in return dy1 amount of token Y.

=> On the AMM the price has shifted from P to P - dp.

We can also write this equation in terms of price change and the amount of token X that was sold (dx).

To do that we'll need to get two prices, the price of the CEX and the price of the AMM

Take the difference, multiply it by dx and this is the arbitrage profit

Let's start with the AMM price

Let's find the blue slope:

Let's also rewrite dy0 in terms of price and dx

We are now ready to rewrite the arbitrage profit

In some cases, we can further sumplify this equation:

Finally:

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Test Arbitrage

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Forking mainnet

hardhat.config.js

  networks: {
        hardhat: {
          forking: {
            url: `https://eth-mainnet.alchemyapi.io/v2/${process.env.ALCHEMY_API_KEY}`,
       },
     },
  }

Note: Replace the ${} component of the URL with your personal Alchemy API key.

npx hardhat test test/flashSwap.test.js

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Note

Further reading

You can find Uniswap pools referenced below. Select a pool with the highest TVL

Uniswap V3 Pool Infos

You can find official Uniswap documentation below:

Single Hop Swap

Multi Hop Swap

Sources

Smart Contract Engineer

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Roadmap

• [-] Maths
• [-] Test on mainnet fork
• Deploy on mainnet?
• Further reading

See the open issues for a full list of proposed features (and known issues).

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Contributing

Contributions are what make the open source community such an amazing place to learn, inspire, and create. Any contributions you make are greatly appreciated.

If you have a suggestion that would make this better, please fork the repo and create a pull request. You can also simply open an issue with the tag "enhancement". Don't forget to give the project a star! Thanks again!

1. Fork the Project
2. Create your Feature Branch (git checkout -b feature/AmazingFeature)
3. Commit your Changes (git commit -m 'Add some AmazingFeature')
4. Push to the Branch (git push origin feature/AmazingFeature)
5. Open a Pull Request

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License

Distributed under the MIT License. See LICENSE.txt for more information.

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Contact

Reda Aboutika - @twitter - [email protected]

Project Link: https://github.com/Aboudoc/Uniswap-V3-Arbitrage.git

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Acknowledgments

• Smart Contract Engineer

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