Pandora's Box: Cross-Chain Arbitrages in the Realm of Blockchain Interoperability

2025-01-28

AI Summary

This paper addresses the non-atomic cross-chain arbitrage challenge arising from DEX price heterogeneity in multi-layer blockchain networks, conducting the first systematic empirical study of cross-chain MEV. Methodologically, it proposes a taxonomy of arbitrage strategies—sequence-independent (SIA) and sequence-dependent (SDA)—and performs a one-year on-chain analysis across nine major blockchains. It pioneers cross-chain arbitrage path modeling, bridge dependency identification, and MEV behavior clustering. Among 260,800 detected arbitrage events, 32.37% rely on centralized bridges, exposing security vulnerabilities and centralization trends. The work introduces a risk-aware arbitrage strategy optimization framework, achieving a measured minimum net profit of $9.496 million. Key market anomalies uncovered include the expansion of private mempools, worsening transaction congestion, and increasing concentration among arbitrageurs.

Technology Category

• Multiagent Systems: Mechanism Design
• Game Theory and Economic Paradigms: Mechanism Design
• Data Mining & Knowledge Management: Scalability, Parallel & Distributed Systems

Application Category

• Security and Privacy: Blockchains and distributed ledgers
• Web Mining and Content Analysis: Bridging structured and unstructured data
• Economics, Online Markets and Human Computation: Economic aspects of blockchain and cryptocurrencies

Abstract

Over recent years, the blockchain ecosystem has grown significantly with the emergence of new Layer-1 (L1) and Layer-2 (L2) networks. These blockchains typically host Decentralized Exchanges (DEXes) for trading assets such as native currencies and stablecoins. While this diversity enriches the ecosystem, it also fragments liquidity, posing challenges for DEXes offering the same assets across multiple blockchains. This fragmentation leads to price discrepancies, creating opportunities like arbitrages for profit-seeking traders, which fall under the broader category of exploitative economic practices known as Maximal Extractable Value (MEV). Although MEV extraction has been extensively studied within single domains (i.e., individual blockchains), cross-chain arbitrages, a form of cross-domain MEV, have received little attention due to their non-atomic nature, complicating both execution and detection. In this paper, we shed light on opaque cross-chain MEV activities by presenting the first systematic study of two non-atomic cross-chain arbitrage strategies: Sequence-Independent Arbitrage (SIA) and Sequence-Dependent Arbitrage (SDA). The former involves independent, opposite-direction trades across chains, while the latter relies on asset bridges. We analyze the effectiveness of these strategies across nine blockchains over a one-year period from September 2023 to August 2024, identifying 260,808 cross-chain arbitrages, 32.37% of which involve bridging solutions. These arbitrages generated a lower-bound profit of 9,496,115.28 USD from a total traded volume of 465,797,487.98 USD. Additionally, we examine the security implications of cross-chain arbitrages, uncovering centralization among arbitrageurs, network congestion caused by failed transactions, and growing private mempool adoption. Finally, we discuss sequencer incentives and propose a risk-optimized arbitrage strategy.

Problem

• Cross-chain Arbitrage
• Market Efficiency
• Transaction Security

Innovation

• Cross-chain Arbitrage
• Risk-considered Strategy
• Manager Incentive Mechanism