Flash Boys 2? Ethereum Bot Wars

A whole new group of traders is colluding to beat the market. No, not Redditors or fiber-optic wielding Wall Street “quants.” Today, in both a simpler and way more complex way money can be made using bots to outbid trades on cryptocurrency markets.

According to research by Flashbots, in the past 30 days alone, $106.5 million of Ethereum (ETH) has been extracted “permissionlessly” from trades on the ETH blockchain. The problem has gotten progressively worse throughout 2020, where Flashbots researcher Alex Obadia started their search.

“After scraping the Ethereum blockchain starting from the first block of 2020, we’ve classified more than 1.3M MEV transactions,” Obadia wrote. “And found a total of at least $314M worth of Extracted MEV since Jan 1st, 2020.”

It’s called Miner Extracted Value (MEV) and Flashbots scoured millions of ETH transactions to find when it happened. Flashbots was created because of the vulnerabilities of decentralized crypto markets, like MEV exploits.

It’s stated that a simple version of how this extraction can be done is by a miner piggy-backing off existing trades, the bot can find a trade waiting to be completed in the blockchain memory pool, and “memsnipe,” creating an identical trade but raising the transaction price to complete it.

The flaw was first documented in a 2019 Cornell economics and crypto research paper.

“Blockchains, and specifically smart contracts, have promised to create fair and transparent trading ecosystems. Unfortunately, we show that this promise has not been met,” Cornell researchers found. “Like high-frequency traders on Wall Street, these bots exploit front-running in DEXes, paying high transaction fees and optimizing network latency to front-run, i.e., anticipate and exploit, ordinary users’ DEX trades.”

Flashbots updated the findings to claim that miners were rarely the culprits and that the term should be amended to Maximum Extracted Value.

Kevin Travers was a Reporter at deBanked.