How Does Transaction Cost Affect the Profitability and Frequency of Arbitrage in AMMs?

Transaction costs, primarily gas fees, establish a minimum threshold for the profitability of an arbitrage opportunity. An arbitrage trade is only worthwhile if the potential profit from the price difference exceeds the cost of executing the transaction on the blockchain.

High gas fees reduce the frequency of arbitrage by eliminating smaller profit opportunities, leading to wider price divergences between the AMM and external markets.