macrocephalopod

I think volume is falling because volume is correlated with retail interest, which is correlated with price. Price is down so volume is down too! As you point out it's hard to do cross-exchange arb with a pure taking strategy because bid/offer is wide and commissions are high.

To arb spot effectively you ideally want to get filled passively on one of the legs, so you collect spread and pay a reduced fee. You then cross spread to hedge on the other exchange. But getting filled passively requires volume!

Volume helps in two regards - first it creates opportunities (e.g. a big trade on one exchange pushes up the price there) and second it gives better passive entry opportunities. Lower volume means less profit for arbs.

Stablecoin unpeg risk is hard. You could either try to maintain a flat delta to USDT naturally (but that means a lot of opportunities are not available to you) or you could explicitly borrow USDT and sell it for USD as a hedge, but borrowing USDT is expensive.

I don't think there is an easy solution!

this is extremely helpful, thanks. So the idea isn't to "make markets" but rather piggyback off real interest/volume in trading of the asset and take advantage of inefficiencies in the platforms and big traders' methodologies?

You can also just make markets on one exchange, which I understand can also be quite lucrative. The arb strategy is not quite providing liquidity, it’s more like moving liquidity from where it’s supplied to where it’s demanded.

Could be a structural reason for it, eg disjoint market participants on the two exchanges for regulatory reasons or whatever — so anyone who can trade on both is able to transport liquidity between them and get paid for it.