Decentralized finance (DeFi) has an opportunity to democratize access to financial markets that have normally only been 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 both retail and institutional investors. When confronted with predatory market behaviors such as miner extractable value (MEV) and front-running attacks, old wounds are opened to the “Flash Boys” era of traditional finance.
DeFi can and must do better, not allowing the failures of the past to creep back into the future. Fortunately, by implementing cryptographic mechanisms that embed transaction privacy into public blockchains, information can be proven against things like an order book without being revealed. This seemingly magical mathematical tactic not only protects transactions from the aforementioned behavior, but also enables auditability, all 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 go back to town
The phrase Flash Boys entered the lexicon after Michael Lewis wrote a highly influential book detailing the phenomenon. When we moved from the open trading floors of old Wall Street to a world of fully electronic trading, traders immediately started coming up with new ways to game the system. Simply put, early tech-savvy brokers used the lightning-fast processing power of modern computer systems to monitor and facilitate high-frequency trades that undercut, or advanced, legitimate incoming trades posted by slower systems. The crypto equivalent of the Flash Boys are the Flash Bots.
In the crypto space, these specialized arbitrage bots will usurp human traders on exchanges by algorithmically predicting their moves and squeezing their trades before a human can change their position. These bots also often get priority in the next block validation by paying higher fees that are calculated based on the performance of the operation. These bots will know in a fraction of a second what trades to perform to optimize your profit.
Another phenomenon that enables scenarios like front-running is miner extractable value. Miners extractable value is 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 interests of the blockchain, their ability to use MEV undermines one of the key value propositions of decentralization, which is censorship resistance.
This malicious behavior incentivizes bad actors to devise and implement numerous predatory actions that can undermine the security of an entire network. Also, most consensus mechanisms do not punish MEV attacks, which, in turn, gives miners the freedom to exploit them.
In a blockchain-native decentralized exchange (DEX), when the presence of Flash Bots is combined with MEV, the threat and resulting costs to the average human user are compounded. If there is ever going to be widespread adoption of crypto and DeFi, then the market environment has to be less hostile to retail consumers. Working on cryptographic methods to protect against this type of malicious behavior is something the industry must prioritize.
rage against the machine
Fortunately, Flash Bot and MEV attacks can be minimized on blockchains and their native DEXs with privacy-focused designs that use zero knowledge proofs (ZKP) to mask transactions without compromising network security. ZKP technology is quickly becoming scalable enough to support use cases such as blind bidding, where the trade transaction is presented, tested, and verified on a DEX without disclosing details such as the size and time of the bid. operation. This mechanism prevents a Flash Bot from being able to look up the trade in an order book and instantly jump ahead with a better bid or ask.
A similar mechanism can be implemented to prevent MEV as well, but instead the transaction is submitted, tested and verified on a blockchain without having to reveal its details to miners. This is the magic of ZKP that can be used to allow protocol rules to be implemented that see what (and how) transactions take place through cryptographic proofs. All this without revealing more information than is necessary to verify the transaction according to the existing protocol rules that said transactions must comply with.
there is no trimester
The ability to share (and test) information without showing it by using ZKP can unlock more widespread adoption by policing cryptocurrency markets for bad actors and safely paving the way for more users. This approach will help the DeFi market grow to unprecedented levels through more 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, readers should do their own research when making a decision.
The views, thoughts and opinions expressed herein are solely those of the author 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 is developing 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 platforms for derivatives using programmable smart contracts escrowed on the Bitcoin blockchain. Warren has two bachelor’s degrees from Northwestern University and did graduate work at Harvard University.
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