Short Paper: Atomic Execution is Not Enough for Arbitrage Profit Extraction in Shared Sequencers (2410.11552v1)

Abstract: There has been a growing interest in shared sequencing solutions, in which transactions for multiple rollups are processed together. Their proponents argue that these solutions allow for better composability and can potentially increase sequencer revenue by enhancing MEV extraction. However, little research has been done on these claims, raising the question of understanding the actual impact of shared sequencing on arbitrage profits, the most common MEV strategy in rollups. To address this, we develop a model to assess arbitrage profits under atomic execution across two Constant Product Market Marker liquidity pools and demonstrate that switching to atomic execution does not always improve profits. We also discuss some scenarios where atomicity may lead to losses, offering insights into why atomic execution may not be enough to convince arbitrageurs and rollups to adopt shared sequencing.

• The paper demonstrates that atomic execution does not guarantee enhanced arbitrage profits in shared sequencing environments.
• It models arbitrage strategies using two CPMM liquidity pools, revealing how trade sizes and external price variations affect profit outcomes.
• The research indicates that under certain conditions, non-atomic operations can outperform atomic approaches, urging more comprehensive system designs.

An Analysis of Arbitrage Profit Extraction in Shared Sequencers

The paper "Atomic Execution is Not Enough for Arbitrage Profit Extraction in Shared Sequencers" by Maria Inês Silva and Benjamin Livshits explores the impact of atomic execution on arbitrage profits within shared sequencing environments in Layer 2 scaling solutions, specifically rollups. This research is grounded in the context of cross-rollup arbitrage under a shared sequencing model, a novel paradigm where transactions across multiple rollups are processed collectively.

Introduction to Shared Sequencing and MEV

The paper identifies the rising significance of shared sequencing solutions in decentralized finance (DeFi), particularly within Layer 2 networks such as rollups. The sequencer plays a crucial role as it schedules user transactions, and thus the design choice between independent and shared sequencers is pivotal. Shared sequencers promise enhanced composability and potentially increased profitability through more effective Miner Extractable Value (MEV) extraction strategies, especially arbitrage, which exploits price discrepancies across exchanges and decentralized exchanges (DEXs).

Despite the theoretical advantages proposed by shared sequencing advocates, empirical support has been minimal. This paper specifically probes whether atomic execution—guaranteeing that either all or none of a set of transactions are completed—sufficiently enhances arbitrage profits to incentivize its adoption.

Modeling Arbitrage in Shared Sequencers

The researchers constructed a model assessing arbitrary profits when employing atomic execution across two Constant Product Market Maker (CPMM) liquidity pools. This rigorous approach included defining profit calculations contingent on trade sizes and failure probabilities for swaps in different rollups, using variable external prices for evaluation.

The framework allows for comprehensive examination of arbitrage strategies under variable conditions, addressing execution scenarios where swaps succeed, partially fail, or fully fail. The introduction of atomic execution ensures that swaps are only executed if all conditions are met, which theoretically impacts profit extraction by minimizing arbitrage risk.

Results and Implications

The analysis finds that atomic execution alone does not guarantee improved arbitrage profits. The expected difference in profits varies according to several factors:

1. Trade Sizes and Pool States: The model indicates larger trade sizes, driven by differences in token reserves and prices, amplify profit variations. However, they do not inherently tilt the advantage towards atomic execution.
2. Relative External Price: The position of the external price in relation to the transactional prices proves crucial. If external prices align unfavorably with pool prices, atomic execution might yield less favorable outcomes.
3. Failure Probabilities: When swap failure probabilities are equal, atomic execution tends to result in lesser profits than allowing swaps to execute independently, thereby suggesting scenarios where non-atomic operations are preferable.

These findings contest the presumed simplicity and efficacy of atomic execution within shared sequencing systems, cautioning against its standalone implementation for arbitrage optimization.

Speculation on Future Developments

Looking forward, insights from this research provoke broader considerations in the design of systems like shared sequencers. While atomicity addresses some arbitrage risks, its complex interplay with market conditions and transaction dynamics must be accounted for before successful implementation. Further research might explore how transaction costs, liquidity convertibility, and empirical data affect these dynamics, providing a holistic view of arbitrage strategies across decentralized networks.

In essence, the paper establishes a nuanced perspective on shared sequencing solutions, advocating for more comprehensive evaluations beyond atomic execution when considering profitability and adaptation in sophisticated financial ecosystems.