iAssets are pegged to the price of their underlying asset. So iBTC is pegged to the price of BTC. iBTC may not always trade the same price of BTC. When price deviates it creates opportunities to profit.
There’ll likely be multiple liquidity pools for each iAsset due to market demand. So while iBTC/ADA may become mispriced, iBTC/dUSD may be correctly priced. In this scenario an arbitrageur can fund iBTC by opening a new CDP, sell their iBTC for ADA, convert ADA to dUSD, use dUSD to buy iBTC, then use the iBTC to close their BTC for a nice profit.
Let’s take the example of Arb. Arb is actively on the lookout to make profit with low risk. Arb sees that ADA is selling for $1 and BTC is selling for $40k. He discovers that iBTC/ADA is priced at 41k. In order to take advantage of this opportunity, Arb takes the following steps:
- Deposits 68k ADA into Indigo
- Funds 1 iBTC
- Sells 1 iBTC for 41k ADA
- Sells 40k ADA for 40k dUSD
- Buys 1 iBTC for 40k dUSD
- Sends 1 iBTC into Indigo to unlock his original ADA
Arb now has 69k ADA (minus fees).