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Arbitrage trading between decentral and central cryptocurrency exchanges
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DOI：10.1016/j.jbankfin.2026.107721.png)
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Abstract
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This paper studies liquidity fragmentation on cryptocurrency markets between automated market maker (AMM) decentralized exchanges (DEXs) and centralized limit order book exchanges (CEXs) and evaluates how practical frictions affect the execution of cross-exchange arbitrage. While most existing studies measure arbitrage opportunities using back-testing approaches based on historical price data, we analyse realized arbitrage trades executed by a high-frequency trading system across two blockchains interacting with Uniswap and Balancer type AMM protocols. Practical arbitrage differs from back-testing because it incorporates operational costs, liquidity constraints, market impact, and competition from other arbitrageurs. We develop a framework to quantify the operational costs and execution risks of cross-exchange arbitrage and examine how these frictions affect realized profitability. Four arbitrage bots deployed on two blockchains generate monthly returns of 24.91%, 33.35%, and 17.39% between November 27, 2023, and December 31, 2023, and 6.15% between September 12, 2024 and October 8, 2024 that result in an overall profit of USD 20,237.48. Our findings show that cryptocurrency markets remain fragmented between DEXs and CEXs and that capital allocation remains inefficient across exchanges. Operational costs, liquidity constraints and blockchain specific execution risks impose important limits to arbitrage. In particular, mempool uncertainty over transaction sequencing makes the effective DEX spot price uncertain prior to block confirmation, thereby reducing arbitrage efficiency between DEXs and CEXs.
Keywords:
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High-frequency trading
Distributed ledger technology
Smart contract
Arbitrage system
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