Optimal Block Times Under Decentralized Exchange Arbitrage with Gustavo Grivol (NYU Stern) | YACL

Abstract.
In this work, we try to map how arbitrage between decentralized and centralized exchanges can create incentives for reducing or increasing latency in blockchains. Under specific price dynamics, we demonstrate that arbitrage opportunities may incentivize block producers to delay releasing a new block until certain price deviations occur. In other price dynamics, latency strategies may even become irrelevant. We not only analyze price dynamics but also examine how factors such as transaction fees, interest rates, and the blockchain consensus mechanism shape different timing strategies. To support the model and results, we developed a more flexible framework for stopping time policies in blockchains and characterized the profit function for arbitrage in Constant Function Market Makers. To empirically assess these incentives, we examine data on Multi-Block Maximal Extractable Value (MEV), a scenario that allows more sophisticated timing strategies.