Risks and opportunities in arbitrage and market-making in blockchain-based currency markets. Part 1 : Risks

Paper: arXiv 2304.08590

Authors: Vittorio Astarita

Abstract

This study provides a practical introduction to high-frequency trading in blockchain-based currency markets. These types of markets have some specific characteristics that differentiate them from the stock markets, such as a large number of trading exchanges (centralized and decentralized), relative simplicity in moving funds from one exchange to another, and the large number of new currencies that have very little liquidity. This study analyzes the possible risks that specifically characterize this type of trading operation, the potential opportunities, and the algorithms that are mostly used, providing information that can be useful for practitioners who intend to operate in these markets by providing (and risking) liquidity.

Complexity vs Empirical Score

• Math Complexity: 3.5/10
• Empirical Rigor: 4.0/10
• Quadrant: Philosophers — conceptual discussion, limited math and data

Why this score: The paper offers a helpful qualitative taxonomy of market-making and arbitrage risks unique to cryptocurrency and DeFi venues. However, it functions more as an introductory survey or practitioner overview rather than a rigorous empirical or heavily mathematical quantitative research paper.

Research Flowchart

  flowchart TD
    A["Research Goal: Identify risks, opportunities, and algorithms in crypto HFT and market-making"] --> B["Data Collection: Analyze centralized (CEX) and decentralized (DEX) exchange characteristics"]
    B --> C["Methodology: Evaluate crypto market mechanics (liquidity, transfer speed, exchange fragmentation)"]
    C --> D["Risk & Strategy Modeling: Assess arbitrage algorithms and liquidity provision risks"]
    D --> E["Key Findings: Characterized crypto-specific risks, identified viable HFT algorithms, and mapped liquidity opportunities"]