Flash Boys 2: Frontrunning, transaction reordering, consensus instability (2019)
arxiv.org
arxiv.org
(1) The word "frontrunning" applies only in a very specific context, where you trade in front of an entity with which you have a client relationship. That is different from capturing a trading opportunity because you are faster than another party. Frontrunning is illegal and law-abiding HFT firms don't do it. They often don't even have clients to which this applies! Being faster is not illegal. Can we please stop using this term to describe behavior we don't like.
(2) What do they mean they introduce the term MEV (miner extractable value)? Everyone calls it that, and it's part of the incentive that miners have to validate transactions.
(3) Might want to add (2019) to the title, this paper is pretty old. Perhaps this answers (2).
Also in this context, the reason that these sandwich attacks can happen is because all the information is public. The adversary can see your transaction waiting to be validated, and pay the miner a higher gas fee to be executed first.
Index front running is not illegal and is based on public information. So, this may be a form of legal front running.
This is a novel construct. It may be wise. But it’s not the status quo.
Most likely none of the transaction signers qualify as clients of the miner. Transactions are transmitted over the network anonymously via a gossip protocol, and hundreds or thousands of miners have the chance to include (or not include) any transaction in a block. Transactions are selected for inclusion in a block effectively randomly, through an entirely mechanical process, and no relationship is established or maintained between the miner and any transaction sender.
In order to assert that a transaction signer is a client of the miner that builds the block that includes the transaction, you would have to redefine what the word “client” means.
This does not seem obvious to me; even if "client" is too strong a word, the transaction signer and miner have some social contract that's very similar to more traditional fiduciary duty, even if the technical details and enforcement mechanisms are totally different.
The primary rationale of fiduciary duty is trust. In contrast, the whole reason that miners even exist is so that the service they provide can be performed in an entirely antagonistic environment, without trust.
I suppose it can be said that a miner’s “social contract is very similar to more traditional fiduciary duty”, but only in the sense that a thing is somehow conceptually related to the exact opposite of that thing.
Miners are anti-fiduciaries.
Words have meaning relative to their context.
The usage is popularized because it makes sensationalist headlines and forum headers, that the "generalized usage" was either misguided or intended to confuse, which correlates poorly with accurately conveying the meaning of word or capturing the details of the blockchain phenomenon.
No, not because of vague connections, but because it does the same kind of destructive thing that’s bad (for the ecosystem) for the same reason it’s bad on the normal market: it extracts value from a transaction because of timing and a privileged position, disencentivizing positive-sum behavior. (In the broker’s case, because of knowing about the transaction; in the miner’s, because of having that mining power and being able to quickly execute on knowledge of upcoming transactions.)
Trading fast based on "slightly obfuscated" public domain information is categorically not any kind of front-running. It is as far as I can see just a pure execution arbitrage.
HFT bonuses (many HFT firms trade crypto now) have been crazy since 2020. Even infra SWEs are making 7 figures of TC.
Watching the full depth order book on any crypto exchange is like “Back To the Future”.
The rules we have are pretty bent. Everything is geared towards transparency but if algos work out your trades are actually moving the price, the liquidity is gone. So vanishing liquidity is okay, but spoofing isn't? Hiding your intention is an innate part of markets, and is a way to defend yourself against other traders.
I actually support more consumer protection, the pump and dumps indicate that some consumers shouldn't be in these markets. But trading has always been the Wild West (and still is but the banditos run the town instead of the Sheriff now).
Traditional HFT market-making is still somewhat competitive in crypto, and it's not helped by the fact the exchanges aren't sufficiently technologically literate to provide a fair playing ground for all participants.
This 2019 paper simply re-confirms that thought. Crypto today is no different than the 1900 turn-of-the-century bucket-shop pump-and-dump scams of previous Wall Street iterations.
For example, you can issue loans to yourself using MakerDAO:
The process is permissionless, meaning, among other things, that it can be automated, and it carries almost zero fees (only the Ethereum gas fee for EVM instructions).
To take another example, the world's leading decentralized exchange, Uniswap, has now overtaken centralized exchanges in market depth for some major trading pairs:
https://uniswap.org/blog/uniswap-v3-dominance
This is a credibly neutral value exchange protocol that major centralized exchanges are coalescing around as a source of liquidity. The market depth is truly impressive. For example, you can sell hundreds of thousands of dollars worth of ETH in one trade with almost zero slippage.
So crypto is not just another iteration of Wall Street.
And to the point of past iterations of Wall Street: the 19th century banking system was not rife with scams as the caricature suggests:
Let this weird parallel financial system develop for another decade and see what comes out of it. Might actually solve some problems.
European market cap 2019: 8,078,748,800,000 (8 trn)
Coinmarketcap today: 1,583,350,504,806 (1 trn)
Not a tiny blip.
Compared to world equity 2021 [3]: 117 trn
I would call it a small blip.
1: https://tradingeconomics.com/european-union/market-capitaliz...
3: https://www.sifma.org/resources/research/research-quarterly-...
I still think it should be regulated and we would be better without the crypto market, but I doubt a crypto crash would have much of an impact on the economy in general.
It's very liquid because it's much more accessible to non-professionals. Giving retail flow direct access is where the revolution lies.