Non-Atomic Arbitrage in Decentralized Finance

TL;DR

This paper investigates non-atomic arbitrage in Ethereum's DeFi ecosystem, revealing its significant volume, centralization issues, and security implications, and discusses potential mitigation strategies.

Contribution

It is the first comprehensive analysis of non-atomic arbitrage involving off-chain exchanges, quantifying its volume and centralization in Ethereum DeFi.

Findings

Over 25% of volume on major DEXes is due to non-atomic arbitrage.

Eleven traders account for over 80% of this arbitrage volume, totaling $132 billion.

Non-atomic arbitrage transactions can exceed 10% of Ethereum's total block value.

Abstract

The prevalence of maximal extractable value (MEV) in the Ethereum ecosystem has led to a characterization of the latter as a dark forest. Studies of MEV have thus far largely been restricted to purely on-chain MEV, i.e., sandwich attacks, cyclic arbitrage, and liquidations. In this work, we shed light on the prevalence of non-atomic arbitrage on decentralized exchanges (DEXes) on the Ethereum blockchain. Importantly, non-atomic arbitrage exploits price differences between DEXes on the Ethereum blockchain as well as exchanges outside the Ethereum blockchain (i.e., centralized exchanges or DEXes on other blockchains). Thus, non-atomic arbitrage is a type of MEV that involves actions on and off the Ethereum blockchain. In our study of non-atomic arbitrage, we uncover that more than a fourth of the volume on Ethereum's biggest five DEXes from the merge until 31 October 2023 can likely be attributed to this type of MEV. We further highlight that only eleven searchers are responsible for more than 80% of the identified non-atomic arbitrage volume sitting at a staggering $132 billion and draw a connection between the centralization of the block construction market and non-atomic arbitrage. Finally, we discuss the security implications of these high-value transactions that account for more than 10% of Ethereum's total block value and outline possible mitigations.