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What is an arbitrage strategy in the world of MEV?

Arbitrage is an MEV strategy that allows traders to profit from price differences between the same asset in different markets. In the traditional financial world, this creates an opportunity to make two trades to get the two exchanges into equilibrium—and make a little profit for doing so.

• You would start with asset A and sell it for asset B on the exchange where asset B is cheaper. Then, you would take asset B and sell it for asset A on the other exchange, receiving more of asset A in return than when you started. This basic example is extremely competitive in traditional finance and many High Frequency Traders compete against each other to be the first ones to complete the arbitrage opportunity. In the MEV world, things are a little bit more complicated. In crypto, transactions are submitted to the mempool—which, for the most part, is public— for inclusion into the next block. This means traders can see pending transactions in the mempool and know what the effects will be once they are finalized on-chain.
• This added visibility results in MEV arbitrage working slightly differently than traditional arbitrage because traders don’t need to wait until transactions are on-chain to find an opportunity. As a result, MEV searchers need a real-time data feed of the mempool to analyze each transaction as it comes in.
• Once you detect a transaction that might cause an arbitrage opportunity when it lands on-chain, you can send your two transactions that will complete the arbitrage opportunity directly into the mempool or to the flashbots private relay as a bundle. If done correctly, this means the mempool transaction that creates the opportunity + your two transactions will all be mined in the same block. As a result, the moment that arbitrage opportunity is created it is also completed by the next two transactions—your two transactions.
• The key insight is that you know this transaction will impact the price between token A and token B on Uniswap V2, but not on another DEX like Sushiswap… at least not until somebody takes advantage of the arbitrage opportunity. The moment this transaction is mined, token A will be cheaper on Uniswap than Sushiswap, so whoever can sell token A on Sushiswap for token B and then sell those token Bs on Uniswap for token A should end up with more token A than they started. And that is exactly what this example illustrates. There is some specific math that you can do to calculate the optimal amount to trade back and forth, but is beyond the scope of this post.