Pioneering Flash Bots and Maintaining Fairness in the Crypto Market

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Decentralized finance (DeFi) has the opportunity to democratize access to financial markets that were typically only open to the rich and powerful. But, DeFi will only survive and continue to grow if we take steps to ensure things are safe, private, and fair for retail and institutional investors. In the face of predatory market behaviors such as miner extractable value (MEV) and foreground attacks, this is opening up old wounds to an era of traditional “Flash Boys” finance.

DeFi can and should do better by not allowing the failures of the past to come back into the future. Fortunately, by implementing cryptographic mechanisms that build transactional privacy into public blockchains, information can be proven with things like an order book without being revealed. This seemingly magical mathematical tactic not only protects transactions from the aforementioned behavior, but also allows for auditability, while preserving the confidentiality of individual or institutional accounts. This approach will foster a more accessible DeFi industry and provide a fairer and more liquid market for all.

The boys are back in town

The phrase Flash Boys entered the lexicon after Michael Lewis wrote a highly influential book detailing the phenomenon. When we moved from the trading floor at the outcry of old Wall Street to an all-electronic trading world, traders immediately began to find new ways to outsmart the system. In short, early tech-savvy brokers used the lightning-fast processing power of modern computer systems to monitor and facilitate the undercutting of high-frequency trades, or top-tier legitimate inbound trades released by slower systems. . The Flash Boys’ DeFi crypto equivalent is Flash Bots.

Related: Bitcoin’s Latest Security Challenge: Simplicity

In crypto, these specialized arbitrage bots will spoof human traders on exchanges by algorithmically predicting their moves and squeezing their trades before someone can change their position. These bots also often get priority in upcoming block validation by paying higher fees which are calculated based on return on trade. These bots will know in a fraction of a second which trades to make to optimize their profit.

Another phenomenon that enables scenarios like front-running is the extractable value of miners. MEV is just a fancy new way of describing how miners can extract value by deliberately prioritizing or ordering transactions to their advantage. When miners work against the best interests of the blockchain, their ability to use the MEV undermines one of the key value propositions of decentralization, namely censorship resistance.

This malicious behavior prompts malicious actors to come up with and implement numerous predatory actions that can compromise the security of an entire network. Additionally, most consensus mechanisms fail to punish MEV attacks which, in turn, give miners the freedom to exploit them.

Related: Is the rise of derivatives trading a risk for retail crypto investors?

On a blockchain-native decentralized exchange (DEX), when you combine the presence of Flash Bots with MEV, the threat and resulting costs to the average human user compound. If there is to be widespread adoption of crypto and DeFi, then the market environment needs to become less hostile to retail consumers. Working on cryptographic methods to protect against these types of malicious behavior is a priority for the industry.

Rage against the machine

Fortunately, front-end Flash Bot and MEV attacks can be minimized on blockchains and their native DEXs with privacy-centric designs that use zero-knowledge proofs (ZKP) to hide transactions without compromising network security. ZKP technology is quickly becoming scalable enough to support use cases such as blind auctions, where the trade transaction is submitted, proven, and verified on a DEX without revealing details such as size and time. of the transaction. This mechanism prevents a Flash Bot from finding the trade in an order book and instantly launching it with a better bid or ask.

A similar mechanism can also be implemented to prevent MEV, but instead the transaction is submitted, proven, and verified on a blockchain without having to reveal its details to miners. It’s the magic of ZKP that can be used to enable the implementation of protocol rules that see what transactions (and how) are happening through cryptographic evidence. All this without revealing more information than necessary to verify the transaction according to the existing protocol rules that said transactions must follow.

Show no mercy

The ability to share (and prove) information without showing it through the use of ZKP can unlock more mainstream adoption by monitoring crypto markets for bad actors and paving the way safely for more users. This approach will help the DeFi market reach unprecedented levels through greater safety, security and fairness, without compromising the decentralized nature of the industry.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Warren Paul Anderson is vice president of product at Discreet Labs, which develops Findora, a public blockchain with programmable privacy. Previously, Warren led the product at Ripple for four and a half years, working on the XRP Ledger, Interledger and PayString protocols, the RippleX platform and RippleNet’s On-Demand Liquidity enterprise product. Prior to Ripple, in 2014, Warren co-founded Hedgy, one of the first DeFi platforms for derivatives using programmable escrow smart contracts on the Bitcoin blockchain. Warren holds two bachelor’s degrees from Northwestern University and did graduate work at Harvard University.


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