The people behind Flashbots say they are trying to solve a serious problem.
Crypto traders are calling this the “sandwich” maneuver, and no one wants to be the turkey caught in the middle. Here’s how it works: You are trying to get another trader on the network to buy a token, such as Ether or other so-called altcoin. Then you too place an order. If you are able to make your purchase before the other trader, you will get a good deal on a coin that you know is in demand. Your purchase increases the price that the other buyer has to pay. By completing the sandwich, you sell for an easy profit.
This kind of front-running has been a problem for people trading crypto for a long time. This happens on decentralized exchanges that run on a technology called Ethereum, as transactions appear for a period of time before they are completed. Computer programs called bots scour networks for such opportunities, and the practice has exploded recently, thanks to the release of a free, open source tool called Flashbots.
Before Flashbots, “there was a high probability that you wouldn’t be front-running,” says Anton Bukov, co-founder of crypto-exchange aggregator, 1-Inch. “Since it was released, a lot of people got access to it, and they started pushing all these merchants.” This has opened up a debate in the crypto community that is familiar to anyone who follows the arguments about high-frequency traders in equities: Are computerized traders just taking money out of other people’s pockets? Or can they instead help the crypto market function better?
The people behind Flashbots say they are trying to solve a serious problem. Similar to Bitcoin, Ethereum runs on a blockchain, which is a public digital ledger maintained by computers connected to the Internet. Users known as miners earn cryptocurrency by processing transactions on this ledger. Transactions are not instantaneous – instead, they are accumulated and then processed by miners in pieces called blocks. Miners have the power to decide which transactions occur first in a block. So they can potentially place the front-running trades themselves, or they can sell the opportunity to someone else, preferring orders that promise higher transaction fees. “We haven’t even scratched the surface of shenanigans miners,” says researcher Coin Metrics co-founder Nick Carter.
Flashbots doesn’t eliminate shenanigans, but it seeks to make them “democratic, distributed, and transparent,” in the words of Phil Dion, Ph.D. student at Cornell Tech which is one of the creators of the tool. He is also the co-author of an influential paper that drew widespread attention to the problem of crypto front-running and the incentives for miners to allow it. It was titled “Flash Boys 2.0”, a Michael Lewis bestseller for high-frequency stock traders, who many complained that they used front-running tactics.
Flashbots essentially cut the market out of line. Its auction feature lets anyone bid on a position in the queue, and miners charge the winner. Bringing this activity out into the open and making it more streamlined, the system’s creators say, could reduce stress on the Ethereum network and eliminate the incentive for miners to try the dossier strategy. Flashbots can also be used to prevent front-runs from happening: for example, merchants using 1inch can use it to pay miners to ensure that their transactions are at the expected value. Be.
Dion says that transparent auctions separate the system from the “violent, opaque manipulation that goes on in traditional financial exchanges.” Flashbots is backed by Project Paradigm, a crypto venture capital firm that has invested in Uniswap, the creator of one of the most popular decentralized coin exchanges.
Tarun Chitra, who worked in high-frequency trading before co-founding the crypto financial modeling platform Gauntlet, says the markets for flashbots are imperfect, but the way online ads are auctioned may improve over time. . “If the current situation is the ultimate solution, I would say it is a net negative,” Chitra says of Flashbots. “But it’s a good move in the long run.” Ethereum co-founder Vitalik Buterin has talked about the inclusion of some features of Flashbots in an updated version of the system and is asking for input from the Flashbots team. Most analysts agree that flashbots themselves are not going away.
Some see front-running any form of decentralized finance, or DeFi, as a threat to the young but rapidly growing world. It refers to apps that allow crypto users to do everything from trading tokens to borrowing and lending them. DeFi apps have built complex systems to encourage users to participate. For example, to make crypto loans possible, an app needs merchants who are willing to buy tokens that are held as collateral. If front-running bots consistently snap those transactions, those players could walk away. “It eliminates all kinds of incentives – it breaks the whole system,” says Tal Berry, co-founder of cryptowallet provider ZenGo.
Ari Jules, a professor at Cornell Tech who co-authored “Flash Boys 2.0”, compared the Flashbots auction approach by selling the rights to solve burglaries in the city and using the revenue to fund police. . “This only makes sense as part of a false narrative that there is no other way,” he and two other academics wrote in an opinion column for crypto news site CoinDesk. One option would be to create a blockchain protocol that ensures that transactions are properly ordered. Jules is also chief scientist at a company that is working on ways to do just that.
Crypto insiders believe there are around 1,000 bots in action on Ethereum. But chances are only 10 groups of sophisticated traders make the bulk of the profits, says Nathan Worsley, who believes he is one of those traders. Worsley has an econometrics degree from the University of Queensland, worked at a small hedge fund in Hong Kong, and started two crypto exchanges before being known as “discoverers” or bot operators. In addition to front-running known trades, searchers can also make money by finding profitable opportunities faster than others. Worsley says he does not run for ethical reasons.
Worsley has run and built about 50 bots, often with the help of other people with whom he shares profits. It currently has nine bots running, sending transactions every 10 seconds on average. “It’s an industry that’s pretty anonymous,” says Worsley, one of the only explorers to use his real name. “I have a very close relationship with the people represented by anime characters.”
Successful searchers, like high-frequency traders, work hard to minimize the time it takes to wire their orders so they can beat rivals on an order. Worsley pays cloud services about $20,000 or more per month to use his servers, and he specifically looks for those in locations close to specific Ethereum miners or relays. “The rise of Flashbots created more competition. A lot more people came in,” says Worsley, noting that the business is becoming less profitable. He changes his bots daily, judging by the Flashbots auction data. On some level it is like a game of chess or a game of poker. It’s certainly not an easy thing to do.”
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)
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