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Arbitrage on Decentralized Exchanges

Author

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  • Xue Dong He
  • Chen Yang
  • Yutian Zhou

Abstract

Decentralized exchanges using automated market makers create arbitrage opportunities with centralized exchanges, where gas fees and transaction ordering are critical. Existing models largely overlook competition among arbitrageurs, despite price discrepancies being public information. We develop the first equilibrium model of gas fee competition between two arbitrageurs under three transaction reversion settings: no-revert, auto-revert, and selectable-revert. We show that pure symmetric equilibria do not exist, but unique mixed equilibria can be characterized. Comparative analysis reveals that under low inventory risk, the no-revert setting favors arbitrageurs in terms of profit, while auto-revert and selectable-revert settings enhance market efficiency. Under high inventory risk, the no-revert and selectable-revert settings dominate the auto-revert setting in both profitability and efficiency. Using data from Binance and Uniswap V2, we empirically confirm that arbitrageurs face positive inventory risk and validate our model's implications: gas fees increase with price discrepancies and liquidity, while trading amounts rise with both price discrepancies and gas fees.

Suggested Citation

  • Xue Dong He & Chen Yang & Yutian Zhou, 2025. "Arbitrage on Decentralized Exchanges," Papers 2507.08302, arXiv.org, revised Feb 2026.
    • Handle: RePEc:arx:papers:2507.08302
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    File URL: http://arxiv.org/pdf/2507.08302
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    References listed on IDEAS

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    1. Anil Donmez & Alexander Karaivanov, 2022. "Transaction fee economics in the Ethereum blockchain," Economic Inquiry, Western Economic Association International, vol. 60(1), pages 265-292, January.
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    3. Xue Dong He & Chen Yang & Yutian Zhou, 2024. "Optimal Design of Automated Market Makers on Decentralized Exchanges," Papers 2404.13291, arXiv.org, revised Nov 2024.
    4. Alfred Lehar & Christine Parlour, 2025. "Decentralized Exchange: The Uniswap Automated Market Maker," Journal of Finance, American Finance Association, vol. 80(1), pages 321-374, February.
    5. Christian Ewerhart & Philip J. Reny, 2022. "Corrigendum to “On the Existence of Pure and Mixed Strategy Nash Equilibrium in Discontinuous Games”," Econometrica, Econometric Society, vol. 90(6), pages 1-2, November.
    6. Guillermo Angeris & Alex Evans & Tarun Chitra, 2021. "Replicating Monotonic Payoffs Without Oracles," Papers 2111.13740, arXiv.org.
    7. Arnaud Laurent & Luce L.D. Brotcorne & Bernard Fortz, 2022. "Transaction fees optimization in the Ethereum blockchain," ULB Institutional Repository 2013/349664, ULB -- Universite Libre de Bruxelles.
    8. Lennart Ante & Aman Saggu, 2024. "Time-Varying Bidirectional Causal Relationships between Transaction Fees and Economic Activity of Subsystems Utilizing the Ethereum Blockchain Network," JRFM, MDPI, vol. 17(1), pages 1-28, January.
    9. Son, Bumho & Lee, Yunyoung & Jang, Huisu, 2025. "A two-stage game model of probabilistic price manipulation in decentralized exchanges," Economic Modelling, Elsevier, vol. 147(C).
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    Cited by:

    1. Fayc{c}al Drissi & Xuchen Wu & Sebastian Jaimungal, 2025. "Equilibrium Liquidity and Risk Offsetting in Decentralised Markets," Papers 2512.19838, arXiv.org, revised Mar 2026.

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