Arbitrage

As mentioned earlier, a system of arbitrage works to ensure fair prices for zap-ins and zap-outs; this is the final piece to the puzzle of how Revo functions.

Recall that zap-ins to an RFP token are supported by meta-liquidity pools between mcUSD and that RFP token. The meta-liquidity pool is considered balanced when the value of the mcUSD in the pool is exactly equal to the value of the RFP in the pool. The value of the RFP in the pool is exactly equal to the amount of LP that backs that RFP. As time goes on, all else equal, the RFP in the meta-liquidity pool will be worth more and more LP as auto-compounding occurs. Starting from a perfectly balanced pool, this would lead to a situation where RFP can be zapped for at a discount. Likewise, when somebody zaps-out from RFP starting from a perfectly balanced pool, the meta-liquidity pool will also be off-balance such that zap-ins are at a discount. This discount is in relation to how much it would cost to mint new RFP by directly depositing the underlying LP token. When this sort of discount is available, arbitrage occurs which brings the meta-liquidity pool back into balance.

Similarly, when somebody zaps in, the balance of the meta-liquidity pool will be shifted in the opposite direction. In this case, it would be cheaper to mint RFP by directly depositing the underlying LP. When this opportunity arises, automated arbitrage also works to bring the meta-liquidity pool back into balance.