How Does Network Congestion Affect the Latency of an Arbitrage Transaction?
Network congestion increases the time it takes for a transaction to be confirmed and included in a block. Even if an arbitrageur pays a high gas fee, the sheer volume of pending transactions can lead to unpredictable delays.
This increased latency means the arbitrage opportunity is more likely to be closed by other traders or for the price to move unfavorably before the transaction executes, resulting in a failed trade and a lost gas fee.
Glossar
Transaction Latency
Impact ⎊ Transaction Latency is the total time elapsed from when a user broadcasts a transaction to when it is confirmed and finalized within a block on the blockchain ledger.
Failed Trade
Event ⎊ A trade failure occurs when an intended transaction, often involving cryptocurrency derivatives or spot assets, does not complete its lifecycle due to technical or operational impediments.
Layer-2 Scaling Solution
Architecture ⎊ These solutions operate as secondary protocols built atop a base layer blockchain, designed to process transactions off-chain to enhance throughput and reduce per-unit cost.
Network Congestion
Latency ⎊ Network congestion within cryptocurrency, options trading, and financial derivatives manifests as increased latency, directly impacting execution speeds and potentially leading to adverse selection against slower participants.
Arbitrage Opportunity
Discrepancy ⎊ An arbitrage opportunity in cryptocurrency, options, or derivatives arises from temporary price imbalances across different markets or forms of the same asset, representing a risk-free profit potential.
Pending Transactions
Confirmation ⎊ Pending transactions represent unconfirmed instructions within a distributed ledger, existing in a mempool prior to inclusion in a block.