Failed Arbitrage

A failed arbitrage is a transaction that attempts to exploit price differences for the same asset across different markets but does not complete profitably. The arbitrageur's expected profit is eliminated by factors like slippage, transaction failure, or being front-run by another bot. This turns a theoretically risk-free opportunity into a realized loss, often from gas fees or unfavorable price movements during execution.

Failure is most often due to execution risks inherent in blockchain transactions.

• Network Congestion: High gas fees or slow block times can delay execution, allowing the price discrepancy to close.
• Slippage: The actual execution price differs from the expected price due to low liquidity or large trade size.
• Transaction Reverts: Smart contract logic (e.g., insufficient output amount) or insufficient gas can cause the entire transaction to fail, incurring costs with no gain.

Competition from other automated bots is a major source of failure, often falling under Maximal Extractable Value (MEV).

• Front-running: A competing bot sees the profitable arbitrage transaction in the mempool and pays a higher gas fee to have its own identical transaction executed first, stealing the opportunity.
• Back-running: A bot executes immediately after a large trade that creates a new arbitrage opportunity, again beating the original searcher.
• Sandwich Attacks: The arbitrageur themselves can become the victim, with their trade being sandwiched between two other transactions.

A failed arbitrage has direct financial impacts:

• Gas Fee Loss: The most common outcome; all gas spent on the failed transaction is lost.
• Impermanent Loss: If providing liquidity as part of a cross-DEX arbitrage, the bot may be exposed to temporary loss if prices move before the sequence completes.
• Opportunity Cost: Capital is tied up and unavailable for other profitable trades during the failed attempt.

Arbitrage bots employ several tactics to reduce failure rates:

• Gas Optimization: Using private transaction relays (e.g., Flashbots Protect) to avoid public mempool front-running.
• Simulation: Running a full simulation of the transaction via eth_call or a Tenderly fork to check for profitability and potential reverts before broadcasting.
• Dynamic Slippage Tolerance: Adjusting acceptable slippage based on real-time network conditions and liquidity depth.
• Atomic Transactions: Bundling all steps of the arbitrage (e.g., via flash loans) into a single transaction to eliminate interim price risk.

A classic example is a cross-DEX trade:

1. Plan: Buy 100 ETH on Uniswap for $3,000 each and simultaneously sell it on SushiSwap for $3,010.
2. Failure Point: A competing bot front-runs the buy on Uniswap, driving the price to $3,005. The original bot's buy executes at the higher price.
3. Result: The price difference is now only $5. After accounting for gas fees, the trade is unprofitable. The bot's transaction completes but results in a net loss, constituting a failed arbitrage.

Arbitrage is the primary mechanism that aligns prices across decentralized exchanges (DEXs). When arbitrage fails, price discrepancies persist, leading to:

• Inefficient markets where assets trade at different prices on different venues.
• Increased slippage for users trading on the mispriced venue.
• Reduced capital efficiency as liquidity is not optimally allocated across the ecosystem.

Failed arbitrage represents lost revenue for protocols and a transfer of value to miners/validators or MEV searchers.

• DEXs and LPs miss out on swap fees from the correcting trade.
• Failed transactions still pay gas fees, which are captured by the network.
• Sophisticated MEV bots may exploit the lingering opportunity, extracting value that would have gone to LPs or the protocol treasury.

Failed arbitrage transactions contribute directly to network congestion and economic waste.

• They consume block space without producing a useful state change.
• They drive up gas prices for all network participants.
• The gas spent on the failed transaction is permanently burned or paid to validators, representing a net loss to the trader with no ecosystem benefit.

Frequent arbitrage failures undermine confidence in DeFi's reliability.

• Retail users may lose funds to front-running or poor execution.
• Protocol developers must design increasingly complex systems (like time-weighted average price oracles) to mitigate the impact of temporary price distortions.
• It highlights the adversarial environment where transaction ordering can determine profit or loss, complicating user experience.

Persistent price discrepancies pose a direct risk to overcollateralized lending platforms.

• Oracles may report a price from a DEX with a temporarily inflated or deflated asset value.
• This can trigger faulty liquidations of healthy positions or allow undercollateralized borrowing, threatening protocol solvency.
• The 2022 Mango Markets exploit was a stark example of oracle manipulation enabled by low-liquidity, manipulable prices.

Maximal Extractable Value (MEV) is the profit that can be extracted by reordering, including, or censoring transactions within a block. Failed arbitrage is a direct consequence of MEV competition, where a searcher's transaction is outbid or front-run by another, resulting in a reverted transaction and a gas fee loss. This is a primary source of wasted gas on networks like Ethereum.

Slippage is the difference between the expected price of a trade and the price at which it actually executes. In arbitrage, slippage can cause a profitable opportunity to disappear before a transaction is confirmed, leading to a failed trade. High slippage tolerance can also result in sandwich attacks, where the arbitrageur becomes the victim of MEV, suffering significant losses.

A gas fee is the payment required to execute a transaction on a blockchain. In arbitrage, searchers engage in gas wars, competitively bidding higher fees to have their transaction included first in a block. The losers in this auction pay their gas fee but their transactions revert, constituting a classic failed arbitrage. This dynamic directly transfers value from failed searchers to block validators.

A flash loan is an uncollateralized loan that must be borrowed and repaid within a single blockchain transaction. It is a fundamental tool for arbitrageurs to capitalize on large price discrepancies. However, if the arbitrage logic fails (e.g., due to price movement or being outbid), the entire transaction—including the loan repayment—reverts, resulting in a failed arbitrage with no loss of principal, only gas.

A transaction reversion occurs when a smart contract execution hits an error (e.g., a failed condition check) and is rolled back, undoing all state changes. This is the technical outcome of a failed arbitrage. The transaction is recorded on-chain, gas is consumed, but the intended asset swaps do not occur. Reversions protect users from bad trades but are the mechanism of loss in failed arbitrage.

Atomicity is the property where a series of operations within a transaction either all succeed or all fail together. Arbitrage strategies rely on atomicity to ensure safety: either all legs of the trade execute profitably, or the entire transaction reverts. Failed arbitrage exploits this property—the transaction atomically fails, protecting the arbitrageur from partial execution but still incurring a gas cost.