Master's Thesis Thomas Wagner

Quantifying Cross-Chain Rebalancing Arbitrage Between Ethereum and Polygon

Abstract

With the rise of Decentralized Finance (DeFi) on smart contract blockchains such as Ethereum, the area of Maximal Extractable Value (MEV) has become increasingly important. Empirical studies on MEV so far have mainly focused on value extraction activities in an atomic fashion on a single chain. As the DeFi ecosystem expands across multiple blockchains, analyzing cross-chain MEV strategies becomes increasingly relevant. The consideration of value extraction across different blockchains introduces a higher level of complexity, as each blockchain has unique characteristics, such as block time and opaque account identities. This research aims to develop a methodology for quantifying cross-chain portfolio rebalancing arbitrage between Ethereum and Polygon. Finally, the profitability of this strategy will be determined with historical data and then compared with related MEV strategies. 

Research Questions

• RQ1: What is the current state of research on cross-domain MEV?
• RQ2: How can we develop a robust methodology for identifying cross-chain portfolio rebalancing arbitrage?
• RQ3: What is the value extracted through cross-chain portfolio rebalancing arbitrage on the Ethereum-Polygon domain, how many searchers are involved, and what is the strategy profitability between October 2023 and March 2024?
• RQ4: How profitable is cross-chain portfolio rebalancing arbitrage compared to other MEV strategies?

External Advisor: Filip Rezabek (TUM I8)