Front running, flash bots and keeping things fair in the crypto market

Decentralized finance (DeFi) has the ability to democratize access to financial markets that have typically been open only to the rich and powerful. But DeFi will only survive and continue to grow if we take steps to ensure everything is safe, private and fair for both private and institutional investors. When faced with predatory market behavior such as miner extractable value (MEV) and front-running attacks, it opens old wounds in a “Flash Boys” era of traditional finance.

DeFi can and should do better by not allowing the failures of the past to creep back into the future. Fortunately, by implementing cryptographic mechanisms that integrate transaction 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 ensures auditability, while preserving the privacy of individual or institutional accounts. This approach will foster a more accessible DeFi industry and provide a more equitable and 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. As we transitioned from the open-outcry trading floor of old Wall Street to a fully electronic trading world, traders immediately began to think of new ways to play the system. In short, the earliest tech-savvy brokers used the ultra-fast processing power of modern computer systems to monitor and facilitate high-frequency trades that undercut, or front-running, legitimate inbound trades posted by slower systems. The crypto DeFi equivalent of the Flash Boys is Flash Bots.

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In crypto, these specialized arbitrage bots will usurp human traders on exchanges by algorithmically predicting their moves and pushing their trades before a person can change their position. These bots are also often prioritized in the upcoming block validation by paying higher fees calculated against the return on the transaction. These bots know in a split second which trades to make to optimize their profits.

Another phenomenon that allows for scenarios such as front-running is the recoverable value of miners. MEV is just a fancy new way of describing how miners can extract value by deliberately prioritizing or ordering trades in their favor. When the miners work against the blockchain’s interests, their ability to use MEV undermines one of the key value propositions of decentralization and that is resistance to censorship.

This malicious behavior encourages attackers to devise and perform numerous predatory actions that can undermine the security of an entire network. Furthermore, most consensus mechanisms fail to punish MEV attacks, which in turn gives miners the freedom to exploit them.

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On a blockchain native decentralized exchange (DEX), when you combine the presence of Flash Bots with MEV, the threat and the resulting cost to the average human user. If crypto and DeFi ever become mainstream, the market environment should become less hostile to retail consumers. Working on cryptographic methods to protect against this kind of malicious behavior is something that the industry should prioritize.

Rage against the machine

Fortunately, front-running Flash Bot and MEV attacks on blockchains and their native DEXs can be minimized with privacy-focused designs that use zero-knowledge proofs (ZKP) to mask transactions without compromising network security. ZKP technology is rapidly becoming scalable enough to support use cases like blind bidding, where the trade transaction is submitted, proven and verified on a DEX without revealing details such as trade size and time. This mechanism prevents a Flash Bot from looking up the trade in an order book and playing it right up front 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. This is the magic of ZKP that can be used to implement protocol rules that see what (and how) transactions take place through cryptographic proofs. All of this can be done without revealing more information than is necessary to verify the transaction according to the existing protocol rules that the transactions must comply with.

No quarter of an hour

The ability to share (and prove) information without showing it through the use of ZKP could unlock more mainstream adoption by monitoring crypto markets for malicious parties and securely paving the way for more users. This approach will help the DeFi market grow to unprecedented levels through increased 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 carries risks, and readers should do their own research when making a decision.

The views, thoughts and opinions expressed herein are those of the author only and do not necessarily reflect or represent the views and opinions of Coin-Crypto.

Warren Paul Anderson is vice president of product at Discreet Labs, which develops Findora, a public blockchain with programmable privacy. Previously, Warren led 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 derivatives platforms to use programmable escrowed smart contracts on the Bitcoin blockchain. Warren has two bachelor’s degrees from Northwestern University and graduate studies from Harvard University.

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