Designing and Backtesting Cross-Exchange DEX–CEX Arbitrage
Summary
This report explains how to design a cryptocurrency arbitrage strategy across centralized exchanges and decentralized exchanges using automated market maker pools. It covers the differences between order-book prices and pool pricing, then identifies costs and constraints that determine whether a quoted spread can be traded: gas, trading and transfer fees, borrowing liquidity and collateral limits, slippage, and the delay between observing a price gap and getting a DEX transaction confirmed. The example strategy compares ETH prices on a centralized venue and a USDC–ETH pool, estimating pool price impact before trading and borrowing assets where needed to structure the two sides.
The report describes a backtest that placed 19 trades over 28 days and returned 8.5% on capital in one month. Those results depend on assumptions that the bot detects gaps and calculates fees and slippage immediately. The authors warn that real execution faces competing traders, changing prices, higher slippage, and potentially higher gas costs, so the simulated results do not establish that the opportunity is low-risk or repeatable.
Key ideas
- DEX–CEX price gaps can arise from differences between order-book trading and automated market maker pools.
- A viable trade must account for gas, venue fees, borrowing constraints, slippage, and execution delay.
- Pool price impact and order-book depth matter when estimating realizable arbitrage profits.
- The reported backtest made 19 trades over 28 days and returned 8.5% on capital in one month.
- The backtest assumes rapid detection and cost calculation, while live competition can worsen execution and costs.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.