Decentralized Exchange

Arbitrage on Decentralized Exchanges ArXiv ID: 2507.08302 “View on arXiv” Authors: Xue Dong He, Chen Yang, Yutian Zhou Abstract Decentralized exchanges (DEXs) are alternative venues to centralized exchanges (CEXs) for trading cryptocurrencies and have become increasingly popular. An arbitrage opportunity arises when the exchange rate of two cryptocurrencies in a DEX differs from that in a CEX. Arbitrageurs can then trade on the DEX and CEX to make a profit. Trading on the DEX incurs a gas fee, which determines the priority of the trade being executed. We study a gas-fee competition game between two arbitrageurs who maximize their expected profit from trading. We derive the unique symmetric mixed Nash equilibrium and find that (i) the arbitrageurs may choose not to trade when the arbitrage opportunity and liquidity is small; (ii) the probability of the arbitrageurs choosing a higher gas fee is lower; (iii) the arbitrageurs pay a higher gas fee and trade more when the arbitrage opportunity becomes larger and when liquidity becomes higher; (iv) the arbitrageurs’ expected profit could increase with arbitrage opportunity and liquidity. The above findings are consistent with our empirical study. ...

DEX Specs: A Mean Field Approach to DeFi Currency Exchanges ArXiv ID: 2404.09090 “View on arXiv” Authors: Unknown Abstract We investigate the behavior of liquidity providers (LPs) by modeling a decentralized cryptocurrency exchange (DEX) based on Uniswap v3. LPs with heterogeneous characteristics choose optimal liquidity positions subject to uncertainty regarding the size of exogenous incoming transactions and the prices of assets in the wider market. They engage in a game among themselves, and the resulting liquidity distribution determines the exchange rate dynamics and potential arbitrage opportunities of the pool. We calibrate the distribution of LP characteristics based on Uniswap data and the equilibrium strategy resulting from this mean-field game produces pool exchange rate dynamics and liquidity evolution consistent with observed pool behavior. We subsequently introduce Maximal Extractable Value (MEV) bots who perform Just-In-Time (JIT) liquidity attacks, and develop a Stackelberg game between LPs and bots. This addition results in more accurate simulated pool exchange rate dynamics and stronger predictive power regarding the evolution of the pool liquidity distribution. ...

Expiring Assets in Automated Market Makers ArXiv ID: 2401.04289 “View on arXiv” Authors: Unknown Abstract An automated market maker (AMM) is a state machine that manages pools of assets, allowing parties to buy and sell those assets according to a fixed mathematical formula. AMMs are typically implemented as smart contracts on blockchains, and its prices are kept in line with the overall market price by arbitrage: if the AMM undervalues an asset with respect to the market, an “arbitrageur” can make a risk-free profit by buying just enough of that asset to bring the AMM’s price back in line with the market. AMMs, however, are not designed for assets that expire: that is, assets that cannot be produced or resold after a specified date. As assets approach expiration, arbitrage may not be able to reconcile supply and demand, and the liquidity providers that funded the AMM may have excessive exposure to risk due to rapid price variations. This paper formally describes the design of a decentralized exchange (DEX) for assets that expire, combining aspects of AMMs and limit-order books. We ensure liveness and market clearance, providing mechanisms for liquidity providers to control their exposure to risk and adjust prices dynamically in response to situations where arbitrage may fail. ...