Crypto brothers front-ran the front-runners | Hacker News Reader

Crypto brothers front-ran the front-runners

bloomberg.com

112 pointsfeross93 comments

I'm uncomfortable with the tax dollars of hard working people being used to defend the likes of those who use robots with million dollar wallets to rake up the low hanging fruit of digital arbitrage on an entirely unregulated network.

They wanted the rewards that came with this risk. Now that they got hustled, they cry foul, and the DOJ is going to spend huge amounts of money litigating their case?

Perhaps it is in and of itself just a new form of "front-running justice" or "administrative arbitrage." What wonderful new things our digital world has brought us.

> they got hustled, they cry foul, and the DOJ is going to spend huge amounts of money litigating their case?

Do we know how the case originated? I similarly agree this seems bizarre. It’s probably illegal. But unless it’s setting an important precedent it seems like a waste of public money.

> But unless it’s setting an important precedent

It is

> Do we know how the case originated?

This is a very curious question because it’s such a technical situation that it’s hard to believe DOJ wasn’t most likely explained it by outside parties, most likely the victims I assume.

Oh it won't be a waste. DoJ will seize, fine, and disgorge enough to cover the prosecution and some. An easy cash grab from an unsympathetic defendent who lacks the lawyers of the corporate bot runners.

TFA: "They worry that this microsecond-scale competition between algorithms is socially wasteful"

I would LOVE to see a stock market that

(a) time-penalizes large orders -- 1 share trades in a microsecond, 10000 shares takes a week to execute

(b) adds a random time delay to all orders in the range of [0,60] minutes for corporations, [0,10] minutes for residential traders, and [0,1] minutes for people who have provably low income

This will restore opportunities to real humans and drastically reduce the advantages that institutions and robots have.

IEX runs with similar goals in mind to ban HFTs with special access and level the playing field.

https://en.wikipedia.org/wiki/IEX

> people who have provably low income

You want to give all your financial info to your brokerage?

What increasing latency will do is widen the markets. We’ll go back to the days of multiple cents or dollars between the bid and offer prices of stocks.

It will definitely increase the time horizon to make an investment profitable. But maybe that’s a societal good for some people…

In the modern era, adding a speed bump might just mean that all the trading moves overseas, to derivatives, or mutual funds. Money finds a way of flowing downhill

> You want to give all your financial info to your brokerage?

You have little choice anyway. Once you give them your identification, which is required by KYC laws, it's a small matter of getting your financial information from the data brokers who possess it.

I think this runs counter to the purpose of having a stock market. The stock market is not supposed to let everyone can gamble on a level playing field, it is supposed to make it as easy as possible for companies to raise money.

The government believes it’s entitled to taxes on the usd value of any acquired digital coins/tokens. I’d have more sympathy to your perspective if this wasn’t the case (although I’m still sympathetic)

My guess is the government is trying to disincentivize tax evasion and money laundering.

Its technically not tax evasion until they don't pay taxes on it, right? All they did was usurp people who were already cheating. If they were really concerned about tax evasion and money laundering, the feds could've just opened a case, assigned a few agents to it and then waited. They knew who did it, how they did it and still went after them before any real crime had been committed.

100% agree. Tax dollars should be used to regulate/protect things which are valuable for society.

I feel like the people who wonder why this is a crime are missing something pretty important: this isn't the SEC attempting to regulate a crypto market by prosecuting securities fraud, it's the DOJ prosecuting straight-up old fashioned fraud. The crime is changing the terms of the transaction within the 12 second time frame after it had begun but before it had finished, and ultimately selling something different than what was promised. It doesn't matter that it's crypto, you could similarly be prosecuted for fraud by selling counterfeit pokemon cards if prosecutors could prove you knew that you were misrepresenting the cards as genuine cards. Here, the prosecutors have all the evidence they need from the code, and the Google searches showing what their intent was in writing that code.

how is the blockchain under the purview of the us govt? these were transactions submitted to a blockchain created for the sole purpose of not being controlled by the government

all these code is law folks are constantly exposed as just looking to get rich quick

They did decide they’re entitled to taxes on transactions..

I bet this indictment will be used as a case study to justify the need for government oversight and taxation.

The fraudsters are American so the US Government certainly has jurisdiction over their actions. Blockchain doesn't really matter to that.

> how is the blockchain under the purview of the us govt?

Likely some inter-state commerce clause that gets used to bring many things under the purview of the feds. It may be more appropriate to ask how it was supposed to not be under the rule of law?

> these were transactions submitted to a blockchain created for the sole purpose of not being controlled by the government

Simply creating a blockchain with that intent in mind seems to be no more effective than a sovereign citizen ranting to a LEO that they are 'traveling by conveyance' in their car and thus not subject to traffic laws.

The brothers did the act while in the US, so they're still under the jurisdiction of the US legal system. You can agree by contract to have contractual disputes handled under a certain jurisdiction, arbitration, or within the contractual agreement that defines all rights in a dispute, but you can't just will yourself out of criminal legal culpability by saying that no laws apply to you, even if the victim also were to say no laws should apply. Think about it from another practical perspective: if immunity from laws could be granted by the victim of a crime, imagine the pressure criminals would put on victims to state that they consented to the crime.

All fraud conducted in the US or related to the US in any way is under the purview of the US government. The specifics of how it was done doesn't really matter.

But you're not signing EULA's in order to participate in the network. Moreover, there are no real "laws / regulations" within the network either, specifying what you are or are not allowed to do. Ethereum standards merely determine how the software is supposed to work, but even then I'm sure Ethereum devs would oppose treating their docs as an agreement (because they don't offer any warranty, licensing or attestation). Moreover, there is an express goal to have a diverse set of software clients, so even developing your own software to be interoperable with existing standards can't be constructed as "an attack".

All this to say, I just fail to say how this can be constructed as "changing the terms of the transaction". There was no legal agreement between parties and no existing precedent to treat this as a malicious attack at all.

All I see is a Wall Street establishment pulling strings in order to protect their investment, by asking for a sudden government oversight in the system that was built with the express goal of not requiring any government oversight.

> asking for a sudden government oversight in the system that was built with the express goal of not requiring any government oversight.

Clearly, it has failed at that goal. This should not be surprising in the slightest.

Government gunna govern.

prior to MEV-relay arbitrage bots and generalized frontrunners did this in the public mempool via the gas auction... MEV-relay allows them to instead submit bundles of transactions ordered in the way that makes them the maximum amount of profit by offering bribes to validators to include those bundles. those bundles cost money for other network participants, because you can take a swap transaction from the public mempool and include it in a bundle where you swap before and after that transaction and profit from the slippage. this is done decreed by law but because it appeals to the financial self-interest of the searchers and validators involved. the submitted bundles are supposed to be secret--the defendants in this case figured out how to force the validators to leak the proposed blocks by signing them with an invalid header. they could then submit their own bundle that cost the original submitter money by frontrunning their attempted frontrunning.

you used to be able to trick sandwich bots without having to rely on this level of hack, see for example:

https://www.coindesk.com/tech/2021/03/22/bad-sandwich-defi-t...

so of course (smart) sandwich bot authors immediately started writing checks for poison tokens.

i'm honestly shocked that they're being prosecuted for this since it's a slight escalation on behavior that has evolved many times in ethereum's past.

> But to me what is wild about this case is that the Justice Department is bringing down the full weight of US federal criminal law to protect Ethereum front-running bots.

What is surprising about that? The US tax man is making shitload of money happily taxing gains US citizens are making on cryptocurrencies. Not to mention businesses like Coinbase and Circle that are not only paying their taxes in the US but are also, at times, buying a lot of US government debt. The US government is, literally, indebted to these companies and functioning partly thanks to the taxes paid by crypto holders.

You cannot have your cake and eat it too: if you want to collect taxes, you take care of the bad actors. If you want Coinbase to operate in Dubai and all crypto-related companies in the US to move to the UAE or Switzerland, you outlaw crypto altogether in the US once and for all.

But then you don't come crying from the taxpayers dollars you don't get.

There is plenty of commerce happening in Dubai/UAE and Switzerland that US does not collect taxes on. I have never heard anyone complain about missing out on those.

Only if US tax residents are involved in the commerce does the US care. IRS will find a way to tax the commerce if US tax residents are involved, irrespective of where the crypto-related companies are located.

A (very) technical explanation of the attack: https://collective.flashbots.net/t/post-mortem-april-3rd-202...

@scrlk summed it up:

MEV bots sandwich attacking traders = okay

MEV bots sandwich attacking other MEV bots = fraud

> In particular, the malicious proposer constructed their own block that broke the sandwich bots’ sandwiches up and effectively stole their money.

Deep cognitive disonnance or do these people really think they have enshrined privilege now?

The way they tracked this really leads me to think this was a fund like wintermute, Jump or DRW that got screwed in this case.

They would have done all the detective work and then went to the authorities with a case fully done. I just don't see the government putting resources into tracking this the way that the fund that lost out on their sandwich trade would.

Things like this truly make me wonder what the whole point of crypto is. On one hand, if it is truly "decentralized finance" and "code is law", then, well, hats off to these MIT brothers who executed their code. I mean, nearly a decade ago the DAO was hacked due to code bugs, and despite the hard fork of Ethereum (which was quite controversial), many people thought it was essentially a fair bug bounty.

If though, crypto requires things like the FBI and the legal system to enforce fair rules for participants, what benefit does it give over "traditional" finance? That is, isn't the whole reason for crypto existing in the first place is that it doesn't depend on governmental backing?

You are so close...... Honestly, crypto was an interesting experiment that has devolved into nothing more than digital penny stocks.

Yep. And penny stocks are also already digital, for all intents and purposes. So, not sure what remains, apart from long-in-the-tooth unfounded hype and cultists.

Penny stocks rarely have similar market caps...

I’m a big fan of Warren Buffet. If he says it’s shit, then it’s probably shit.

The reason for crypto to exist is to be a secondary financial system that you didn't need to be well connected to old-money entities or families in order to "win" from. The 2008 financial crash spurred many anti-capitalist and hyper-capitalist movements, one of the latter being cryptocurrency. They saw how nakedly well-connected people absolutely cashed the fuck out with the near-collapse of the banking system permitting absurd amounts of money to flow to the markets that had created the problem in the first place, and led to tons of well-paid executives being given golden parachutes out of their industry, so fucking rich they would never have to work again. The anti-capitalist response to that sort of thing is "this system is broken and should be destroyed" and the hyper-capitalist response is "how do I get in on this thing" and the truth of the matter was, there wasn't really a way to get in on it if you weren't already in on it. Hence the creation of an entire second financial sector, recreating all of the failures of the existing one, without any of the regulations, and resulting in the exact same outcomes: the little guys get screwed, and the whales sail away into the sunset with unfathomable profits for basically doing nothing.

I'm not saying blockchain based technology itself is useless. Of course it has uses, some really good ones too. But cryptocurrency has always been 100% grift.

>you didn't need to be well connected to old-money entities or families in order to "win" from.

And this was always a lie. One of the biggest boosters of crypto is Andreesen-Horowitz FFS, and plenty of the rest of the people well known in the industry are just Wall Street Finance bros or dotcom boom lottery winners.

And to the extent that there are “normal people” making money in crypto, they’re doing it in all the same slimey ways the slimeballs of ye olde traditional finance did it: rent-seeking, speculation, and insider trading.

Like seriously, how laughably obvious can the whole spiel be? Let’s all switch to this other currency because it’s “more fair,” and yes I do happen to already have a gigantic stake in this new currency and I’m just looking for you to come in at the ground floor so you can inflate my wealth!

Anything productive happening at any point in any of this? Well considering my entire motto is HODL, how could I possibly be doing anything productive? It is the purest, most naked form of rent-seeking someone could invent.

Crypto might somewhat divest itself of old money but it’s utterly dominated by new money. It’s an oligarchy with democratic elements.

Perhaps that’s inevitable though.

It's certainly inevitable when you create a new financial system with all of the same problems as the old one and simultaneously not only strip away anything resembling consumer protections but in fact make them even harder to re-implement should anyone try.

It's a direct clone of the existing system just practically engineered from jump for financial fraud. No shock at all then that the entire thing is absolutely awash in fraud.

And the key word is need: yes it's absolutely dominated by old money assholes, but it didn't start that way, though I'm sure it was always intended which is why the most prominent crypto grifters follow the rich closely and invest in the same coins. Getting in early right before or after the big fish before the hyperdeflation kicks in (what they call "to the moon") is how you make money in crypto. You just need to then reckon with the fact that you only got rich because tons of other folks went broke, but again, if you're the hyper-capitalist type you probably see no issues at all with stepping on millions of your fellow workers if it means you get out of the wage-slave fuck barrel.

> That is, isn't the whole reason for crypto existing in the first place is that it doesn't depend on governmental backing?

I think the realization here, is that Crypto/Blockchain was competing against the DOJ (or the courts in general) rather than against the US dollar. While the US government/Fed were largely cool about crypto trying to replace the USD (many assets are, anyway), the court seems strict about maintaining it's authority of being the arbiter of who owns what.

This story reminds me of when people accuse domain sellers like GoDaddy on snooping their domain queries, buying their domain and then selling it to them for more money.

This happened to me with Namecheap a year ago. I bought a $XX .io domain for what I thought was a steal, paid for it and everything. Namecheap canceled the order, refunded me, and now it's on sale for $X,XXX.

Apparently it was a "third party domain listing" and totally not their fault, of course.

Discussed yesterday on Hacker News

https://news.ycombinator.com/item?id=40369522

This just screams arbitrary application of rules to an entirely new system. How can you enforce rules for something with such a murky definition of the actors and their actions? Sure it “looks like” old finance, but it most certainly isn’t.

This exercise of arbitrary rules on a murky, hardly even legally defined entirely new system, is why I can see the reasoning for something like defi to want to exist.

$28M of somebody else's money seems like a small price to pay for securing enough attention to either address the situation that made this possible, or create a new market in it to close the arbitrage gap...and this is especially true when the "somebody else" got that money in shady-but-not-illegal ways in the first place.

It's like the bug bounty system is built into the code.

Let's hope federal prison sentences for bounty hunters and full restitution of the bounty itself doesn't become a hallmark feature of other bug bounty schemes.

Sorry, don't get it. We can also say that Vitalik manipulated Ethereum protocol when the DAO hack ocurred, even if the DAO hack was a crime. There is no precise line to define what is right or wrong in crypto.

Rephrasing it: there are a lot of things that happen in crypto, MEV itself, that are no different than what these brothers did.

Interesting, I know this is possible on a few other blockchains as well. I was asked to write code to front run trades on one of them, but laughed and turned it down. Seemed like it would end up something like this article.

This is possible in any market scenario where there exists buyers and sellers separated by a physical medium bound by the speed of light. Front-running is a fundamental property of market dynamics.

The DOJ wants the traditional finance market to be the only keyholders in arbitrage. Anyone who has experienced market open slippage will understand this.

[dupe]

More discussion: https://news.ycombinator.com/item?id=40375258

And on official Justice post:

https://news.ycombinator.com/item?id=40371371

https://news.ycombinator.com/item?id=40369522

I’m glad to see that fraternal crypto fraud is no longer a monopoly of the Winkelvoss twins.

Also glad to see my alma mater in the press.

Correct me if my understanding is wrong, but there are no crypto transactions involved with arbitrage in the common case. Arbitrage is concerned with the relative price of two assets, for example BTC/USD. There is no bitcoin transferred from exchange A to exchange B, simply the trade of USD to BTC on exchange A and BTC to USD on exchange B.

That is done, but you need a lot of capital due to bitcoin's slow block times. You'll need to have capital on both places to take advantage of the price differential since the price will shift to much by the time you migrate funds from one CEX to another.

But this post isn't about bitcoin, it's about Ethereum. Ethereum is where all the innovation and most of the financial activity occurs. Arbitrage MEV comes from different onchain decentralized exchanges, slippage, defi liquidations, etc.

Arbitrage definitely happens in crypto. It’s how prices stay consistent across exchanges. If you have a small decentralized exchange with relatively low liquidity, arbitrage bots come in to capitalize on price discrepancies across exchanges.

The arbitrage is happening on on-chain exchanges which require transactions to work with.

sandwich bots exploit swap slippage on decentralized exchanges... e.g. a user submits a swap transaction from currency A to currency B with high allowed slippage, a sandwich bot notices and copies that transaction from the public mempool and constructs two swap transactions on either side of it where they swap from A to B before the user and swap from B to A after, profiting from the price move of the user's swap. they submit this as a bundle to MEV-relay with a tip high enough to have it included in a block, and if it's included they book the profit. if not included there's nothing at risk, not even wasted gas. there IS risk if the bundle is exposed to other searchers, which is what happened in this case. multiple bots will often find submit the same bundle with escalating tip amounts, so the profit eventually becomes slim with more participants trying the same sandwiches.

It's heartbreaking to me that these guys aren't just allowed to get away with this. What's even the point of cryptocurrency if the algorithm isn't law?

These guys did nothing wrong.i was pretty happy when this happened. It's funny seeing the guys running MEV bots all butthurt when someone out smarts them. But it's scary that the DOJ is siding with them.

From my understanding as well, they didn't exploit a bug in Ethereum, but in the MEV bots' parsers. Hopefully all those Google searches for a Saul Goodman-esque Cryptocurrency lawyer will pay off.

I really don’t see what these guys did wrong. Good for them for making away with $25 million…the government should leave them alone.

After all, crypto bros wanted decentralized finance where code is law. But they’ll run to the government when someone outsmarts them.

Reminds me of people from corrupt countries parking their money in countries with strong rule of law, where they know it can’t be seized without due process. Sheer hypocrisy.

It's not hypocrisy. These people aren't these ones advocating for cypherpunk. They are mostly wallstreet bros that have carved a lucrative market. They see stealing from others as completely fine, but if people do the same thing to them which they're doing to others they throw a hissy fit and use their connects to make an example and set precedent.

> crypto bros wanted decentralized finance where code is law

Ethereum and associated "defi" people are emphatically not the same people as the "code is law" people. One of the first things Ethereum did was throw out the whole notion of "the rules are the rules" during this event, when they rolled back the entire ethereum blockchain after a clever trade that wiped out a (now defunct) shitcoining operation: https://en.m.wikipedia.org/wiki/The_DAO

Lumping everyone into "crypto bro" is doomed to incorrectly predict the social-political dynamics here

> when they rolled back the entire ethereum blockchain

The Ethereum did a dick move but there was no rollback of the chain. None. Zero.

What happened is that the ETHs from the DAO hacks were locked for a few weeks (months?) in a smart contract, even after the hack. The (dark side) hacker couldn't get them immediately. So kid Vitalik quickly changed the code and pushed a new versions in which the rules of the game were modified, preventing the unlocking of the stolen ETHs.

But at no point was a single transaction rolled back.

The term they googled makes it clear they fully knew they weren't doing something clean.

I totally see what they did wrong and here's the proof they knew too:

> "allegedly “searched online for, among other things, ‘money laundering,’ ‘exploit,’ ‘computer fraud abuse act,’5 and ‘does the united states extradite to [foreign country]."

But you may be seeing different things than others, including the perpetrators of this crime.

All those web search terms are relevant for indirectly helping find useful defense attorneys. If doesn't in itself demonstrate any guilt.

I am not saying they're not guilty of fraud, only that a jury needs to be massively more objective than look to such searches as evidence of guilt.

Also, there are probably thousands of people who do the same searches without participating in any fraud.

Since when would it even be admissible at trial to seek to obtain the advice of an attorney? The fact the DOJ put that in a press release shows they're grasping at straws.

As far as I know googling isn't illegal. As someone working in security I search for all kind of things. Doesn't mean I am doing them.

I'm not really sure how this is a crime. Can someone explain?

The MEV bots had a protocol that they were expected to follow. These two guys were running a secret cluster of their own bots that strongly violated the expected protocol.

I get that. Where's the criminality in that?

At the minimum it would be a CFAA violation.

Consider this simple case: if you visit me, and I show you a paper with keys to 0.1 BTC. You secretly take a picture of it while I step into the bathroom for a minute. Later you go home and you drain the wallet. In this scenario, did you really do a crime? You only violated protocol. It is not illegal to try random BTC keys. But I think, yes, you did.

The strategy that MEV bots use is not a law. It is not even defined or endorsed by Ethereum standards, and arguably is not an intended feature of the network.

You could alternatively claim that the guys defined their own protocol which addressed market inefficiency (which MEV is). Imo it's insane to claim that a trading technique you invented should have zero risk, and any losses you take are an indication of theft.

To my knowledge, the imprecision of the CFAA is sufficient to prosecute them.

The contrast between this article and the DOJ press release yesterday is astounding.

They really should beat this case. They didn’t do a single thing wrong, no fraud occurred.

Information asymmetry.

DOJ statement reads like a crypto bro has written it. Is it the usual style those statements are written in?

Example(s) of what you mean from the text?

>>Unfortunately for the defendants, their alleged crimes were no match for Department of Justice prosecutors and IRS agents, who unraveled this first-of-its kind wire fraud and money laundering scheme. As cryptocurrency markets continue to evolve, the Department will continue to root out fraud, support victims, and restore confidence to these markets.”

>>Regardless of the complexity of the case, we continue to lead the effort in financial criminal investigations with cutting-edge technology and good-ole-fashioned investigative work, on and off the blockchain.”

Such a BS case. Why are these frontrunners being protected, live by the sword, die by the sword.

At what point does a "clever technique" become a "hack" in the world where code is law?

The biggest mistake I see those in the crypto space make is thinking that you can remove humans from the loop entirely and just rely on machines. It just cannot work.

"Code is law" was always just marketing. For example the original "DAO" had buggy code that allowed malicious actors to take money from the wealthy early investors. Suddenly "code is law" went out the window and the Ethereum chain was forked to get the investors their money back[1].

[1] https://www.gemini.com/cryptopedia/the-dao-hack-makerdao#sec...

Also, much more relevant than a bunch of hucksters showing that they care more about money than ideology,

The DOJ doesn't GAF what you say, they care what the laws are. Tokens are property. They technically gain all the standard property protections, like people aren't supposed to steal them from you, and fraud is still fraud.

If you want code to be law, you would have to pass legislation to that effect, and good luck. We tried wildly unregulated markets before and it was generally bad for the world economy. After FTX, good luck convincing regulators to let you play around with real money even more

> Tokens are property.

What law says this? Technically, tokens are smart contracts, basically OOP classes with both data and behavior. They also by design have public methods which are meant to be triggered by anyone on the chain. It's not at all obvious that triggering these methods in an unexpected order or with unexpected data is breaking any laws whatsoever. It's bytecode anyway, so there's no human readable EULA's or explanations on what you're allowed to do with the token.

> Tokens are property

Why/how? If someone "steals" "my" "property" in an online game, I don't get to call the real-world cops on them. Why should it be any different when you dress up your game in a bunch of finance words?

> Why/how? If someone "steals" "my" "property" in an online game, I don't get to call the real-world cops on them. Why should it be any different when you dress up your game in a bunch of finance words?

I thought the main difference is that game is operated by a legal entity that is a game company so cops will tell you to complain to Epic or whoever.

Imagine if some game is not operated by a single legal entity and becomes popular enough that many people routinely lose all savings etc, maybe justice system can start intervening in such cases.

But anyway in this case there are so many things wrong about prosecuting one thief for outthieving another thief, I don't even know what is the logic.

yeah, you can.

theft online is recognized by police agencies. it's an old but there was this theft in 2007, in RuneScape that resulted in real world penalties for the thieves.

https://www.reddit.com/r/2007scape/comments/klevi5/in_2012_t...

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