Arbitrage Trading: Realized Profits Between DEX and CEX

The idea of “market efficiency” has long been a subject of debate in economics. In theory, it states that markets are efficient, as they are driven by rational actions, and that any error in pricing will soon be corrected by profit-driven decisions.

For example, if the same asset is priced differently between different exchanges, it is expected that the difference will soon be annulled by transactions making money from the difference.

Benefiting from correcting such pricing errors is often called arbitrage: arbitrage traders eliminate such price discrepancies by purchasing on the cheaper exchange and selling on the more expensive one.

In practice, it is much debated if markets can ever be fully efficient as the theory prescribes. One argument against this theory is that market participants are real human beings, and they can act irrationally, be unaware of their own bias, etc.

Another aspect is that technical details, like how the transactions are actually executed in real life, or how information about potential arbitrage is not always available or clear.

Markets tend to be more inefficient in the case of low liquidity, a fragmented marketplace, or a new market yet to have enough efficient actors participating.

This description can match cryptocurrency markets pretty well. So two researchers at the Otto von Guericke University, Magdeburg, Germany, went to investigate the efficiency of capital allocations across cryptocurrency exchanges. More precisely, they checked the “Arbitrage trading between decentralized and centralized cryptocurrency exchanges”¹.

Structure Of Crypto Market Exchanges

Broadly speaking, the exchanges used by cryptocurrency markets can be divided into two categories:

• Automated market maker decentralized exchanges (DEXs), relying on rely on automated market maker (AMM) protocols.
  • DEXs rely on smart contracts deployed directly on the blockchain to facilitate peer-to-peer trading without intermediaries.
• Centralized limit order book exchanges (CEXs)

Currently, more than 250 blockchains operate simultaneously, and each blockchain offers different security models, consensus mechanisms, and performance characteristics. This creates a fragmented capital system in which liquidity is isolated across multiple chains and trading venues. So this could be a good example of a setup where markets cannot be fully efficient.

To transfer assets between different blockchains, several options exist.

The first one is wrapped tokens, issuing procedures where users can transfer assets across blockchains through a bridging provider that locks an asset on its native chain and mints a wrapped representation on another chain.

An alternative is centralized limit order book exchanges (CEXs), which allow users to deposit assets from one chain, trade them within the exchange environment, and withdraw them to another blockchain.

Understanding Real Arbitrage Conditions

Theoretical Arbitrage Vs Practice

So far, most economic studies on the topic have used historical price data to analyze arbitrage opportunities in cryptocurrency markets. They, for example, found in one study, covering 13 CEXs using minute-level data from January 2018 to April 2020, that Bitcoin price discrepancies between exchanges persist despite the rapid growth of cryptocurrency markets.

Historically, this has led to massive discrepancies, with average spreads of up to 15% between Korean and U.S. exchanges during the 2017–2018 period.

However, these studies assume that trades execute at observed prices. This is likely an incorrect assumption, as it ignores key frictions that arise in practical arbitrage trading, including slippage, liquidity constraints, competition among arbitrageurs, and market impact.

Existing research also rarely studies the difference between AMM DEXs and limit order book CEXs, as acquiring the right data requires substantial technical effort.

Instead, this study analyzed directly the realized arbitrage trades executed between DEXs and CEXs, checking the transactions that generate realized profits in cryptocurrency markets.

Proximity To Network

In stock trading, geographical proximity to the exchange enhances execution speed and reduces execution costs, overall increasing arbitrage profits.

In contrast, DEXs run through blockchain validators that are geographically dispersed. So it is challenging to optimize the location to reduce execution speed.

As the DEX operates as a smart contract on the blockchain, node synchronization is important, and network disruptions or corrupt data can block the execution of a trade. For this reason, server-hosted blockchain nodes are preferred to local nodes.

CEXs operate differently, as they are privately managed and act as a custodian for traders. Data is provided through a centralized API, so getting the wrong data is less likely to become an issue.

Research Trading Bot

The researchers created a trading bot to test their hypothesis of a different level of market efficiency between CEXs and DEXs.

It worked in six sequential steps, with the aim of arbitrage the DFI-SOL pool at the DEX, and using both the DFI-USDT and SOL-USDT pairs at the CEX to create an equivalent pair.

Source: Journal of Banking & Finance

The bot was then designed to control for sufficient trading volume (to avoid slippage costs), price differences, markets functioning well, etc.

Study Results: Centralized Versus Decentralized Exchanges

Risks To Arbitrage Strategies

Any arbitrage strategy in any market needs to take into consideration real frictions that can reduce profitability. For example, lack of liquidity, as well as transaction fees and other costs, can absorb a significant part of profits.

However, DeFi, especially DEXs, adds an extra level of uncertainty. This is because, in the absence of a centralized authority and market makers, like in the case of CEXs and regular stock exchanges, the sequence of transactions can be uncertain.

“Mempool” (memory pool) is the decentralized “waiting room” or queue where unconfirmed cryptocurrency transactions sit before being picked up by miners or validators to be added to a blockchain. Transactions that are sent but not yet mined are located in the mempool.

The issue is that most DEXs use the price data received from the smart contract. The smart contract is only updated when a new block is found, and only then is the price updated. However, the real transactions, and therefore the real live price at the DEX, will depend on the mempool transactions, not the often out-of-date smart contract conditions.

This creates a time delay and corresponding outdated smart contract reserves impose the risk of a high price deviation, especially for high-frequency trading.

So mempool uncertainty over transaction sequencing makes the effective DEX spot price uncertain before block confirmation, thereby reducing arbitrage efficiency between DEXs and CEXs.

Inefficient Crypto Markets

Contrary to what would happen in a perfectly efficient market, the researchers found that capital allocation remains inefficient across exchanges, especially between DEXs and CEXs.

This should create an environment potentially rich for arbitrage opportunities.

However, in practice, operational costs, liquidity constraints, and blockchain-specific execution risks create a lot of uncertainty. This translates into inefficient markets that also cannot easily be used for arbitrage, at least not in a consistent manner that leads to safe arbitrage strategies.

Still, the researchers’ arbitrage bots ultimately generated a bit more than $20,000 in profit, so the research does not demonstrate that arbitrage is unprofitable.

What it demonstrates is that DEXs should start to take greater steps to improve their efficiency and interconnections to other exchanges. While blockchain innovations, such as DEX aggregators, have enhanced the efficiency of order flow for on-chain activities, there remains significant potential to improve the order flow between DEXs and CEXs.

For example, smart contract-based solutions that connect both exchanges could help to overcome the inefficiency of fragmented capital in the cryptocurrency markets.

Overall, cryptocurrency markets are still evolving quickly, and it is clear that the current infrastructure is still provisional, with further improvements in market efficiency to be made in the future.

Study Referenced

^{1. Lennart Schwertfeger and Bodo Vogt. Arbitrage trading between decentral and central cryptocurrency exchanges. Journal of Banking & Finance. Volume 188, July 2026, 107721. https://doi.org/10.1016/j.jbankfin.2026.107721}