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Department of Informatics Blockchain and Distributed Ledger Technologies

Simulating Advanced Arbitrage Strategies in Decentralized Finance (DeFi)

Level: MA
Responsible Person: Tao Yan
Keywords: Blockchain, DeFi, Arbitrage, Flashloan, Simulation

In the DeFi space, the emergence of decentralized exchanges (DEXs) such as Uniswap and Sushiswap has created unprecedented arbitrage opportunities. These opportunities arise from price differences across markets, both within individual DEXs and between DEXs. Interestingly, the rise of Maximum Extractable Value (MEV) arbitrage strategies, which utilize innovative tools like smart contracts and Flashloans, has made arbitrage accessible even without a large initial capital requirement. Despite considerable exploration of DeFi arbitrage strategies, there is still much potential in efficiently utilizing MEV across different DeFi markets and optimizing strategies with tools like Flashloans. This thesis aims to address three research questions: Firstly, it aims to identify triangular arbitrage opportunities on Uniswap and simulate their execution in a virtual environment, while evaluating the resulting profits and losses. Secondly, it seeks to assess the impact of integrating flash loans on the profitability and risk profiles of these arbitrage strategies. Lastly, it aims to identify and execute arbitrage opportunities across various markets.

References:

[1] Berg, J. A., Fritsch, R., Heimbach, L., & Wattenhofer, R. (2022). An empirical study of market inefficiencies in Uniswap and SushiSwap. arXiv preprint arXiv:2203.07774.
[2] Wang, Y., Chen, Y., Wu, H., Zhou, L., Deng, S., & Wattenhofer, R. (2022, April). Cyclic arbitrage in decentralized exchanges. In Companion Proceedings of the Web Conference 2022 (pp. 12-19).
[3] Cartea, Á., Drissi, F., & Monga, M. (2023). Execution and statistical arbitrage with signals in multiple automated market makers. Available at SSRN.
[4] Byrne, S. An Exploration of Novel Trading and Arbitrage Methods within Decentralised Finance.
[5] Qin, K., Zhou, L., Livshits, B., & Gervais, A. (2021, March). Attacking the defi ecosystem with flash loans for fun and profit. In International conference on financial cryptography and data security (pp. 3-32). Berlin, Heidelberg: Springer Berlin Heidelberg.