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For those who have hailed blockchain as the be-all and end-all of the modern world, they are in for a nasty shock. A recent research by Cornell Tech has revealed that arbitrage bots are manipulating and exploiting “inefficiencies” in decentralized crypto exchanges, the very backbone of the blockchain structure.
The report brings shocking revelation, especially at a critical juncture where governments are spending extravagant amounts of money on integrating their countries into the blockchain loop. Hailed for its decentralized structure and transparency, blockchain is on its way to make a mark in every industry, but this raises the question as to whether this would be wise.
According to Cornell Tech:
“Like high-frequency traders on Wall Street, these bots exploit inefficiencies in DEXes, paying high transaction fees and optimizing network latency to frontrun, i.e., anticipate and exploit, ordinary users’ DEX trades.”
Around 18 months were spent in tracking trades carried out on 6 anonymous decentralized exchanges. It has been verified that high fees are often paid to make certain transactions a high priority, and these high fees pose a threat to the whole blockchain system. In addition, they could be used to predict and profit from trades by predatory users, which could ruin the economy, slowly looting millions or perhaps even billions in cryptocurrency.
Philip Darian, a doctoral student from Cornell Tech pointed out the absence of a broker, and thereby accountability of a blockchain. An 8 member team led by Ariel Juels, professor of Computer Science at Jacobs Technion-Cornell Institute at Cornell Tech have pointed out the shady dealings of the world of blockchain.
These bots infiltrate the system and take up command alongside human operators. They have, in fact, been created by miners and traders who make unscrupulous dealings, and intend to prosper by making use of the information of others’ trades that flow freely through the crypto platforms. This is equivalent to finding the deal another investor is about to make, and making it before him or her.
In addition to these priority gas auctions (PGA’s), there have also been instances of strategies aiming to make use of the networks’ latency, and responding quicker than humanly possible, in order to exploit the trades placed by people. Apart from all this, there comes more targeted manipulations, aimed solely at the crypto sphere. These Miner Extractable value (MEV) enables the blockchain vulnerabilities to be utilized.
Ariel Juels has stated:
“We have no idea what the extent of the malfeasance is on the centralized exchanges. If we extrapolate from what we’ve seen on DEX’s, it could well be on the order of billions of dollars.”
One of the DEX’s identified was Bancor, which responded by saying that maximum gas prices had been set to prevent attackers from obtaining transaction priority by bidding more. This is striking, as it points out the difficulty of building a marketplace with complete democracy, especially in a world where computing power is spread unevenly. This also raises a very important question, “Will there be regulation in the blockchain domain?”
This event proves the 2018 Wall Street Journal claim that bots are indeed being used to set and manipulate prices of assets on the crypto exchanges.
This might be a defining point in blockchain history, and might be pointing out attention to the billions we might have already lost, but the question still remains, what can be done to curb this? Similar questions are being asked about the safety involved with using blockchain technology. It remains to be seen whether it can stand the test of time or not.