Lending Rate Arbitrage: Cross-Protocol Yield Optimisation

Frequently Asked Questions

01.What is lending rate arbitrage in DeFi?

Lending rate arbitrage is the practice of borrowing an asset on a protocol where borrow cost is low, supplying that same asset on a protocol where the supply yield is higher, and capturing the spread. It depends on each protocol's utilization-based interest rate curve moving independently.

02.How do utilization curves create arbitrage opportunities across protocols?

Aave V3 and Compound V3 each set independent optimal utilization points and slope parameters per asset. When one protocol's utilization sits below its optimal point while a comparable protocol sits above it, the resulting borrow-supply spread on the same asset can exceed the cost of moving capital between them.

03.What risks does cross-protocol rate arbitrage carry for capital allocators?

Smart contract risk on two protocols instead of one, rate compression as arbitrageurs close the spread, gas cost eroding thin margins, and liquidation exposure if collateral is used to support the borrow leg. Ancilar treats gross spread minus gas and slippage as the only figure worth underwriting.