Arbitrage in Crypto Markets: An Analysis of Primary Ethereum Blockchain Data

Abstract

The Ethereum blockchain is a decentralized computing platform providing peer-to-peer financial services. Decentralized exchanges, which run on the blockchain, enable matching of buyers and sellers without any central third party, and are distinct from the centralized “off-chain” cryptocurrency markets often studied in the literature. The decentralized markets facilitate trade in cryptocurrencies and other digital assets and have daily turnovers of several billion dollars. In this paper, I study how arbitrageurs on the blockchain contribute to price discovery and price efficiency in decentralized “on-chain” markets. I collect a transaction-level dataset of primary data from the Ethereum blockchain and cleanly identify a set of completed cross-exchange and triangular arbitrages. To investigate the speed at which arbitrage opportunities are eliminated, I study how sensitive arbitrage profits are to when the trades execute. I show that most arbitrage profits are made immediately after the occurrence of price anomalies, indicating that decentralized markets adjust fast after a shock to the no-arbitrage price.

Keywords: Arbitrage, Price efficiency, Decentralized exchanges, Ethereum, Blockchain, Decentralized finance, Automated market maker, Cryptocurrency

JEL Classification: C55, E42, G12, G14, G23