According to a recent study undertaken by experts at Cornell Tech and other colleges, “Flash Boys”-style trade manipulation is becoming common in the fledgling cryptocurrency market and is expected to be worth billions of dollars. When the research was described in a Bloomberg piece this week, four of the five main cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and Ripple, fell.
According to the report, manipulation has grown common on select decentralized cryptocurrency exchanges (DEXes) and is likely widespread on centralized crypto exchanges as well. “We have no notion what the scope of the misconduct on centralized exchanges is,” said Ari Juels, a Cornell Tech professor, during a blockchain conference at Cornell Tech’s New York City campus. “Based on what we’ve observed on DEXes, it might very well be in the billions of dollars.”
Crypto Behaviors Mimics Wall Street
The research is fittingly titled “Flash Boys 2.0,” since these transactions operate similarly to those in Michael Lewis’ classic book, “Flash Boys,” in which traders utilize high frequency trading and market exploitation tactics to win deals ahead of slower competitors. According to Bloomberg, in the case of cryptocurrency, special arbitrage bots outperform regular consumers’ transactions on decentralized exchanges. These self-learning trading systems enable market manipulators to predict and benefit from the moves of other traders. These traders may also get priority ordering by paying greater fees, enabling them to engage in tactics such as front running, according to the authors of a research issued last week.
How Crypto ‘Flash Boys’ Trade
- Traders deploy sophisticated arbitrage bots to predict and benefit from the transactions of regular customers.
- Traders pay greater fees to get access to techniques like as front running and aggressive latency optimization.
- Market-exploiting conduct is similar to that of high-speed Wall Street traders.
DEX Design Threatens Blockchain Security
DEXes, although not the main way of cryptocurrency trading, are becoming more popular as businesses like as Binance establish their own infrastructure.
“We illustrate how DEX design problems jeopardize underlying blockchain security,” according to the Cornell Tech research. “These bots display many of the same market-exploiting characteristics seen on Wall Street, such as front running, aggressive latency optimization, and so on…”
The authors of the research studied six decentralized exchanges since October, when they discovered over 500 bots producing up to $20,000 every day, according to Bloomberg. The researchers also built their own autonomous trading algorithm to get a better understanding of how these deals were carried out, and they even got a few buyout proposals. “This should encourage the community to examine new exchange ideas,” said Juels of Cornell Tech.
The analysis emphasizes the greater danger of investing in the cryptocurrency market. An previous Bloomberg piece detailed a research that watched the websites of the top 100 cryptocurrency exchanges and discovered that over 90% of traffic was suspicious. Despite this, institutional investors continue to be interested in bitcoin, including Harvard’s large endowment, which is supporting a crypto-company.
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