Why Statistical Arbitrage on L1 Is a Fool's Errand

Statistical arbitrage is impossible on a single L1. The public mempool and deterministic execution eliminate information asymmetry, turning every perceived edge into a public race won by the fastest, most capital-intensive bots.

The real competition is infrastructure, not strategy. Winning requires sub-millisecond latency and gas optimization that outpaces firms like Jump Trading or GSR, turning alpha into a pure execution arms race.

L1 is a symmetric information battlefield. Your statistical model's signal is worthless when every other quant sees the same on-chain data and targets the same Uniswap v3 pool or Curve gauge.

Evidence: The median Ethereum block time is 12 seconds, but profitable arb windows often close in under 500ms. This creates a winner-take-all dynamic where only the first transaction in the block succeeds.

Statistical arbitrage requires probability. Traditional finance profits from tiny, repeated edges across thousands of trades. Blockchain's atomic execution removes this variance; a transaction either succeeds with 100% profit or fails with 100% loss.

On-chain latency is binary. Unlike HFT's microsecond races, a public mempool creates a winner-take-all auction. The first valid transaction to a miner captures the entire opportunity, making backrunning a deterministic, not probabilistic, game.

MEV is the realized cost. The profit from any predictable arbitrage is extracted as Maximal Extractable Value by searchers and validators. Protocols like Flashbots and MEV-Share formalize this extraction, proving the edge belongs to infrastructure, not strategy.

Evidence: The $680M+ in MEV extracted on Ethereum demonstrates that statistical edges are monetized instantly. Tools like EigenPhi and Etherscan's MEV Dashboard show these are atomic, high-value captures, not distributed statistical wins.

Statistical arbitrage is commoditized. The strategy's edge depends on public data and predictable execution. This creates a zero-sum competition where profits are extracted by the MEV supply chain, not the strategy itself.

Searchers and builders own the edge. Entities like Flashbots and Jito Labs control the execution layer. They bundle, order, and censor transactions, capturing the latency and priority fee premium before your arbitrage logic executes.

The real profit is in infrastructure. The MEV supply chain—from private RPCs like BloxRoute to block builders—extracts value by selling speed and positioning. Your strategy's alpha is their revenue.

Evidence: Over 90% of Ethereum blocks are now built by MEV-Boost relays, and Jito's Solana bundles capture ~8% of all priority fees. Your L1 arb bot is competing against the house.

Private RPCs and mempools only provide a temporary edge. Services like Alchemy and Bloxroute offer low-latency access, but they create a new, smaller, and more expensive zero-sum game among sophisticated players. The advantage decays as more participants adopt the same tools.

Layer-2 networks like Arbitrum or Optimism compress block times, making front-running technically impossible within a single rollup. However, this merely externalizes the competition to the cross-chain settlement layer, where arbitrage between L1 and L2 states (e.g., via Across or Hop) becomes the new statistical battleground.

The profit distribution remains power-law. Whether on L1, a private mempool, or an L2 bridge, the fastest 1% of searchers using the best custom ASICs or FPGA setups will capture over 80% of the value. Infrastructure upgrades raise the cost floor, not the win rate for the average participant.

Evidence: Flashbots' MEV-Boost relays, which privatize Ethereum block building, demonstrate that privatization centralizes advantage. The top three builders consistently control >60% of blocks, proving that statistical dominance consolidates with better infrastructure, not dissipates.