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An anonymous researcher has accused Ethereum miners of manipulating transactions for arbitrage on DeFi

An anonymous researcher has accused Ethereum miners of manipulating transactions for arbitrage on DeFi

An anonymous researcher under the pseudonym Frank Topbottom accuses Ethereum miners of arbitrarily including transactions in blocks to manipulate transactions in DeFi.

The researcher
believes that with the development of the decentralized Finance industry (DeFi), the probability of manipulating data in the blockchain for profit only increases. This can be explained by the fact that miners are free to decide which transactions they can process and in what order. This practice is called “extracting value from mining” (miner extractable value, MEV).

Frank Topbottom noticed a number of suspicious transactions added by the SparkPool and F2Pool mining pools. Despite the small fees for conducting these transactions compared to other transactions, they occupied the first places in the blocks. It is noteworthy that such transactions were sent from certain addresses.

The researcher also reported that MEV practices are most common in small pools such as 2Miners, Minerall Pool, and EzilPool, which account for about 2% of the network’s total hashrate. Frank Topbottom gave an example
a questionable transaction with multiple MEV attributes.

First, the Commission for processing it turned out to be almost zero – only 2 Wei (1 Gwei is equal to 1 billion Wei). Wei is the smallest component of the ether. A transaction with such a Commission is unlikely to be confirmed, but in this case it took only 17 seconds to process. Second, the transaction was made for the purpose of arbitrage trading. The sender could earn $70 on a $2,800 transaction. Given the current price of gas, such a deal would not have made a profit, and arbitrage traders would have ignored this possibility. The “culprit” of the transaction is unknown, but he could not have made it without the assistance of the miners.

According to the researcher, thanks to the ability to change the order of transactions at will, miners can outperform any other DeFi users. Miners may abuse their authority to outperform other traders in arbitrage trading, auctions, and token offerings. There are concerns that miners will start sending their own bids with zero Commission and block legitimate auction participants. On the other hand, this is unlikely, since miners will have to perform coordinated actions for a long time.

A more realistic scenario is the competition of miners for high-yield MEV. In this case, they will be motivated in short-term forks of the blockchain to “steal the trophy” from other miners. This can have a bad effect on regular users if they see their transactions being removed from the chain after confirmation.

Frank Topbottom believes that it is extremely difficult to prevent miners from extracting value from DeFi, because their actions do not contradict the rules of consensus. Moreover, these manipulations can be performed not only by miners, but also by stakes in Ethereum 2.0, if the blockchain architecture remains the same. The researcher proposed to solve this problem with the MEV auction, where the rules of behavior for miners will be specified and the “sale of rights” to change the transaction queue at will will be carried out.

Recall that in September, Ethereum miners earned $166 million on commissions, which is a record figure for the entire history of Ethereum. The main factor in the growth of miners ‘ income was the increase in trading activity in DeFi projects.