A Deep Dive into the Dynamics of Ethereum Arbitrage Ecosystem

A Comprehensive Examination of the Ethereum Arbitrage Ecosystem

Authors:

Robert McLaughlin, Christopher Kruegel, and Giovanni Vigna

University of California, Santa Barbara

Abstract:

The rapidly evolving Ethereum blockchn has become the focal point of a sophisticated financial ecosystem underpinned by decentralized exchanges DEXs. These platforms form an intricate capital market allowing any individual to exchange one token for another. Arbitrage trades have always been integral to free capital markets, leading several recent studies to investigate these transactions on decentralized exchanges.

Unfortunately, existing research leaves substantial knowledge gaps regarding the overall system dynamics which hinder advancements in understanding security, stability, and economic impacts of arbitrage activities. To address this significant issue, we conduct two large-scale analyses spanning over a 28-month period.

Firstly, we develop an innovative arbitrage identification that is capable of scrutinizing more than ten times as many DEX applications compared to previous studies. This method uncovers approximately 3.8 million arbitrage trades yielding a total profit of $321 million.

Secondly, our team designs and implements a novel system for detecting arbitrage opportunities that supports contemporary complex pricingat scale. This pioneering tool identifies an unprecedented number of opportunities amounting to nearly 4 billion occurrences per week, with the potential to generate substantial weekly profits around $500,000.

Our findings reveal two crucial insights emphasizing the significance and implications of these measurements:

1. An increasing percentage of revenue goes towards miners, indicating a threat to consensus stability.

2. Arbitrage opportunities occasionally persist across several blocks, implying that price-oracle manipulation attacks could be more financially viable than anticipated.

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