Cross-Rollup MEV: Non-Atomic Arbitrage Across L2 Blockchains (2406.02172v2)

Abstract: This study quantifies the potential non-atomic MEV on Layer-2 (L2) blockchains by measuring the arbitrage opportunities between cross-rollup and DEX-CEX. Over recent years, we observe a shift in trading activities from Ethereum to rollups, with swaps on rollups occurring 2-3 times more frequently, albeit with lower trade volumes. By analyzing the costs of swap on L2s and price discrepancies cross-rollup and DEX-CEX, we identify more than 500 000 unexplored arbitrage opportunities. In particular, we find that these opportunities persist, on average, for 10 to 20 blocks, necessitating the modification of the Loss Versus Rebalancing (LVR) metric to prevent double-counting. Our findings indicate that the arbitrage opportunities in Arbitrum, Base, and Optimism range between 0.03% and 0.05% of the trading volume, while in the ZKsync it fluctuates around 0.25%.

• The paper's main contribution is its empirical quantification of non-atomic MEV arbitrage across various L2 rollups, revealing over 500,000 overlooked opportunities.
• It employs high-resolution data from platforms like Arbitrum, Base, Optimism, and ZKsync Era to calculate arbitrage metrics such as MAV and LVR.
• The study highlights potential gains and operational challenges, advocating for decentralized sequencer systems and refined risk quantification strategies.

Cross-Rollup MEV: Non-Atomic Arbitrage Across L2 Blockchains

The paper "Cross-Rollup MEV: Non-Atomic Arbitrage Across L2 Blockchains" presents a thorough investigation into the potential non-atomic Maximal Extractable Value (MEV) on Layer-2 (L2) blockchains, specifically focusing on arbitrage opportunities across various rollups and between Decentralized Exchanges (DEXs) and Centralized Exchanges (CEXs). The authors, Gogol et al., employ an empirical methodology to quantify these arbitrage opportunities, utilizing data from key Ethereum L2 solutions: Arbitrum, Base, Optimism, and ZKsync Era.

Introduction and Background

Decentralized Finance (DeFi) is progressively adopting rollups for scaling the Ethereum network, primarily due to their ability to reduce gas fees while maintaining security features comparable to Ethereum. The recent Dencun upgrade on the Ethereum network has further optimized these rollup solutions, thereby reducing transaction costs and enhancing performance. In this context, rollups create new avenues for arbitrage, especially between rollups and between rollups and CEXs.

The paper categorizes arbitrage into atomic arbitrage within the same blockchain and non-atomic arbitrage involving transactions across different blockchains. Current MEV extraction is highly active on Ethereum, with a significant portion originating from non-atomic transactions. The rapid block production and reduced gas costs on rollups present enticing prospects for arbitrageurs to exploit minor price variations at an accelerated rate.

Methodology and Data Collection

The authors conduct an extensive data analysis focusing on WETH-USDC pools across the mentioned rollups, employing Nasdaq-level temporal granularity for spot prices on Binance as the CEX reference. By integrating blockchain data from Nansen with Binance's API feeds, the authors meticulously calculate historical price discrepancies and arbitrage metrics such as the Maximal Arbitrage Value (MAV) and Loss-Versus-Rebalancing (LVR).

Empirical Findings

Notably, the paper identifies over 500,000 unexploited arbitrage opportunities, illustrating significant price discrepancies predominantly in the ZKsync Era with an MAV accounting for 0.25% of the trading volume. Other rollups showed MAV between 0.03% and 0.05% of trading volume.

Cross-rollup MEV indicates potential gains, with the largest opportunities existing between L2 AMMs, exceeding those between rollups and CEXs. The paper's MAV methodology adjusts for multi-block misalignments, preventing inflated profit expectations due to time-based price alignment assumptions.

Discussion on Practical Implications

The work implicates potential inefficiencies in current L2 arbitrage avenues, necessitating more sophisticated MEV auction mechanisms and strategies to optimize these nascent opportunities. While rollups promise lower transaction fees, the associated risks—particularly state drift, centralized sequencing, and timing discrepancies—remain formidable challenges.

Practically, the authors emphasize the importance of developing decentralized, fairer sequencer systems to lessen censorship risks and ensure equitable MEV extraction across diverse platforms. Moreover, the effective risk quantification strategies are needed for cross-rollup arbitrage to minimize potential losses from unanticipated L2 price movements.

Future Directions

Future research directions envisioned by the authors include exploring the impact of shared sequencer infrastructures across rollups to synchronize state progressions effectively. Additionally, integrating ZK-rollups could mitigate current limitations on finality speed and transaction completion between rollups, potentially enabling more complex financial operations, including cross-rollup arbitrage.

Conclusion

This paper provides a detailed empirical analysis and quantifies the scope of non-atomic arbitrage and MEV opportunities in Ethereum L2 ecosystems. The results underscore both the fleeting nature and potential profitability of these opportunities, tempered by significant technical and operational challenges. This paper not only enhances the understanding of deFi dynamics on rollups but also sets the stage for further innovations and optimizations within blockchain financial systems.