Arbitraging Positions

Pilgrim allows for continuous valuation of nonfungible assets, which may or may not be backed by liquid assets. This enables arbitrage opportunities for round traders and buyout bidders, which was not possible with existing liquidity protocols and market makers.

Illiquid positions with liquid assets as collateral

Such assets include:

• Uniswap v3 liquidity NFTs

• Maker Vaults: either collateralized Dai borrow positions, or Dai leverage positions on Oasis

• Compound borrow positions

• Borrow positions on Fuse with Rari Capital: e.g. the FeiRari Fuse Pool

• Borrow positions (CDPs) on Mirror Protocol

While those positions have underlying liquid assets, they are not interchangable due to unique features consisting them. For instance, Uniswap v3 positions are nonfungible as they define unique features per position, such as price ranges and fee tiers.

This means that valuation of such positions do not solely depend on its underlying collateral. Multiple factors other than collateral valuation may affect the spot price of those assets on Pilgrim Protocol, which makes Pilgrim rounds for such positions similar to futures derivatives with an undefined expiry date.

For instance, an in-range Uniswap v3 position would be valued higher than an out-of-range position, and a wider in-range position with higher liquidity provider fees would be valued similarly with a narrower in-range position with lower liquidity provider fees, assuming the market is relatively less volatile. Similarly, a Maker or Compound borrow position close to liquidation would be valued at a significant discount, while a long position that has additional collateral margin for borrows and/or accuring interest would be valued at a premium.

Active arbitragers should consider market-making position pools with both rounds and liquidation bids for the best returns, or taking advantage of rebalancing features available natively within corresponding protocols.

Illiquid positions with no collateral

Such assets are usually what the general public refer to as NFTs: proof of attendance, generative art, apes, game items, virtual land, utility assets, etc. They also may be a representation of an asset in the real world through a centralized oracle source that the public finds trustworthy.

Vaulation of illiquid positions with no concrete liquid collateral is largely speculative and heuristic without clear utility or associated economic models. Arbitraging such assets, therefore, should rely on spot prices of similar assets, trading history, or the floor price of assets within the same collection on centralized NFT marketplaces.

Keep in mind that NFT markets are very different from DeFi; economics and finance do not have a place here, and valuation is determined based on artistic value more than anything else. We would recommend going through the history of Dogecoin and other memecoins, and public art auctions, as we expect rounds for artistic NFTs would behave like a combination of those two concepts (liquidity-based trades and auction-based, heuristic vaulation).