Master's Thesis Murad Muradli

Detection and Analysis of Cross-Chain Arbitrages Between Ethereum and Polygon

Abstract

The rapidly evolving landscape of blockchain technology presents numerous opportunities for cross-domain profiting strategies, particularly through arbitrage between different blockchain networks. Scaling solutions such as Optimistic Rollups, zk-Rollups, and sidechains like Polygon have been developed to address the limitations of throughput and high transaction costs on primary networks, enabling faster and more cost-effective transactions and enhancing the overall efficiency of blockchain ecosystems. A significant phenomenon within these ecosystems is Miner Extractable Value (MEV), which refers to the potential profit miners can capture by reordering, including, or excluding transactions within a block. While MEV has been extensively studied within individual blockchains, there is a notable gap in research focusing on MEV opportunities across different blockchains. Cross-chain MEV, particularly arbitrage opportunities between Ethereum and Polygon, presents a complex yet underexplored area. This study aims to fill this gap by quantifying cross-chain arbitrage opportunities between Ethereum and Polygon. We will collect and analyze transaction data to identify instances of arbitrage and measure the profitability of these opportunities. The research will involve a detailed examination of cross-chain interactions facilitated by protocols and smart contracts that enable secure and efficient asset transfers between Ethereum and Polygon. Through empirical analysis, we will assess the frequency and value of arbitrage opportunities, considering factors such as bridging costs, latency, and price discrepancies. This quantification will provide a deeper understanding of the practical applications and potential profitability of cross-chain MEV. Ultimately, this study contributes to the broader knowledge of blockchain economics, offering insights into the dynamics of cross-chain arbitrages and their implications for traders, developers, and the wider blockchain ecosystem. 

Research Questions

1. What is the state-of-art literature on cross-domain profiting strategies in the context of blockchains?

2. How can we develop a methodology to detect cyclic arbitrages between Ethereum and Polygon PoS using the Polygon bridge?

• How can we devise heuristics to identify both successful and unsuccessful arbitrages? 

3. How often do cyclic arbitrages occur between Ethereum and Polygon and how profitable are they?

• Which tokens are used for profiting and how long are the bridging times?
• Is the Ethereum leg of the arbitrage submitted to the public mempool? 

4. How do our obtained results compare to other profit-making strategies observed on blockchains?

• Number of occurrence and profitability compared to strategies such as atomic arbitrages, non-atomic Centralized Exchange - Decentralized Exchange arbitrages, and sandwich attacks.

External Advisor: Filip Rezabek (TUM I8)