Quantifying Arbitrage in Automated Market Makers: Ethereum ZK Rollups Study

Grunnleggende konsepter

Arbitrage opportunities between AMMs and CEXs on Ethereum zk-roll-ups are quantified using the Maximal Arbitrage Value (MAV) metric.

Sammendrag

This study explores arbitrage opportunities between Automated Market Makers (AMMs) on Ethereum zk-roll-ups and Centralised Exchanges (CEXs). It introduces the concept of Maximal Arbitrage Value (MAV) to measure potential profits from price divergences. The research focuses on the USDC-ETH SyncSwap pool, identifying a cumulative MAV of $104.96k from July to September 2023. Various scaling solutions for blockchains are discussed, emphasizing the shift towards roll-ups due to lower gas fees. The paper also delves into the efficiency of DEXs on zkSync Era compared to Binance, analyzing price convergence and liquidity impact on arbitrage opportunities.
Structure:

Introduction to DeFi and blockchain scalability challenges.
Background on Layer-2 scaling and roll-ups.
Overview of Crypto Centralised Exchanges (CEXs) and Decentralised Exchanges (DEXs).
The Theory of Arbitrage on AMMs, including MAV calculation.
Empirical Case Study on zkSync Era, data extraction, and proposed framework.
Insights into MAV Opportunities Identified through clustering analysis.
Regression Analysis for predicting time decay based on MAV magnitude and fees.
Conclusions highlighting implications for roll-up design and future research directions.

Statistikk

Overall cumulative MAV from July to September 2023: $104.96k (0.24% of trading volume).

Sitater

"Decentralized Finance presents a novel alternative to traditional financial services."
"Roll-ups offer 50 times lower gas fees compared to the underlying chain."

Viktige innsikter hentet fra

Quantifying Arbitrage in Automated Market Makers

by Krzysztof Go... klokken arxiv.org 03-26-2024

https://arxiv.org/pdf/2403.16083.pdf

Dypere Spørsmål

How do MEV auctions impact arbitrage dynamics in roll-up environments?

MEV (Maximal Extractable Value) auctions can significantly impact arbitrage dynamics in roll-up environments. MEV refers to the potential profit that miners or validators can extract from the order of transactions and block inclusion on a blockchain. In the context of roll-ups, where transactions are batched off-chain before being settled on the main chain, MEV introduces a new layer of complexity.

Competition for Profit: Miners or validators can prioritize certain transactions over others to maximize their profits through arbitrage opportunities. This competition for extracting value from transaction ordering can lead to frontrunning and sandwich attacks, affecting the fairness and efficiency of trading.

Impact on Arbitrage Opportunities: The presence of MEV incentivizes participants to exploit price discrepancies between different venues more aggressively. Arbitrageurs need to consider not only market conditions but also strategic interactions with miners or validators who may influence transaction outcomes for their benefit.

Risk Management: With MEV in play, arbitrageurs must account for additional risks such as higher gas fees due to bidding wars in priority auction mechanisms used by miners or validators. This dynamic adds another layer of uncertainty and cost considerations when executing trades.

Market Distortions: The existence of MEV auctions can distort market prices and liquidity by favoring certain traders over others based on their ability to pay higher fees or secure preferential treatment from network participants.

In summary, MEV auctions introduce a game-theoretic element into arbitrage strategies within roll-up environments, requiring participants to navigate not only traditional market forces but also strategic interactions with network actors seeking maximal value extraction.

How do price misalignments between DEXs and CEXs impact market efficiency?

Price misalignments between Decentralized Exchanges (DEXs) and Centralized Exchanges (CEXs) have several implications for market efficiency:

Arbitrage Opportunities: Price divergences create opportunities for traders to buy assets at lower prices on one exchange and sell them at higher prices on another, leading to increased trading activity aimed at exploiting these inefficiencies.

Liquidity Fragmentation: Misalignments indicate fragmented liquidity across different platforms, potentially resulting in suboptimal pricing mechanisms that hinder efficient capital allocation.

Market Integrity Concerns: Persistent price differences raise concerns about fair pricing practices across exchanges, highlighting challenges related to transparency and equal access for all market participants.

Volatility Amplification: Large price divergences could amplify volatility as traders rush to capitalize on profitable arbitrages, leading to rapid price adjustments that may not reflect true asset values accurately.

5Regulatory Scrutiny: Regulators may scrutinize markets with significant price disparities between DEXs and CEXs due...
6Investor Confidence: Consistent mispricing could erode investor confidence...
Addressing these issues requires collaboration among exchanges...

How can the proposed MAV metric be applied...Uniswap v3 forks?

The Maximal Arbitrage Value (MAV) metric proposed in the study offers a systematic way...
By applying this framework...
Additionally,...
Overall,...