Decentralized finance (DeFi) has the potential to democratize access to financial markets that are normally only open to the rich and powerful. But DeFi will only survive and grow if we take steps to ensure security, privacy, and fairness for both individual and institutional investors. Faced with predatory market behavior such as recoverable amount (MEV) mining and predictive attacks, they open up old wounds from the “Flash Boys” era of traditional finance.
DeFi can and should do better by not allowing the mistakes of the past to return to the future. Thankfully, with the introduction of cryptographic mechanisms that integrate transaction privacy into public blockchains, information can be verified by things like the order book without being exposed. This seemingly magical math tactic not only protects transactions from the aforementioned behavior, but also allows for auditing while keeping individual or corporate accounts private. This approach will promote the development of an accessible DeFi industry and ensure a fairer and more liquid market for everyone.
The boys are back in town
The term Flash Boys entered the lexicon after Michael Lewis wrote a highly influential book describing the phenomenon. As we moved from the old open floor of Wall Street to an all-electronic trading world, traders immediately began to find new ways to manipulate the system. In short, the first brokers with technical expertise used the ultra-fast processing power of today’s computer systems to monitor and facilitate high-frequency trades that undermined or triggered legitimate incoming trades propagated by slower systems. The DeFi encrypted equivalent of Flash Boys are Flash Bots.
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In crypto, these specialized arbitrage robots will rape human traders in the stock exchanges by algorithmically predicting their movements and forcing them to trade before anyone can correct their position. These robots are often given priority in the upcoming block verification process as they pay a higher fee which is calculated based on the trading volume. These robots will know in a split second what needs to be done to increase profits.
Another phenomenon that enables scenarios such as moving forward is recoverable value extraction. MEV is just a fancy new way of describing how miners extract value by deliberately prioritizing or ordering transactions in their favor. When miners act against the interests of the blockchain, their ability to use MEV undermines one of the main benefits of decentralization: resistance to censorship.
This malicious behavior encourages attackers to invent and carry out various predatory actions that can undermine the security of the entire network. Also, most consensus mechanisms fail to penalize MEV attacks, which in turn gives miners the freedom to exploit them.
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In the original decentralized blockchain exchange (DEX), when you combine the presence of Flash bots with MEV, the threat and cost of the average human user’s car. With the widespread adoption of cryptocurrencies and DeFi, the market environment should become less hostile towards retail users. Working with encryption methods to protect against this type of malicious behavior is a priority for the industry.
Racing against the car
Fortunately, promising Flash Bot and MEV attacks on blockchains and native DEXs can be mitigated with privacy-focused projects that use zero-knowledge proofs (ZKP) to mask transactions without compromising network security. ZKP technology quickly became scalable enough to support use cases such as blind trading, where a trade transaction is sent, confirmed, and validated on the DEX without exposing details such as trading volume and time. This mechanism prevents Flash Bot from looking for an agreement in the order book and immediately launching it with a better offer or offer.
A similar mechanism could also be implemented for MEV locking, but instead the transaction is sent, confirmed, and verified on the blockchain without the need to reveal the details to the miners. It’s the magic of ZKP that can be used to implement protocol rules that see what (and how) transactions are done with cryptographic clues. All this without disclosing more information than is required to confirm the transaction according to the existing protocol rules that transactions must comply with.