Tech
How ‘Flash Boys’ Trading Is Shaking Up the Cryptocurrency World
“Flash Boys”-style trading manipulation is becoming prevalent in the young cryptocurrency market and is estimated to be worth billions of dollars, according to a new study by researchers at Cornell Tech and other universities. Four of the top five cryptocurrencies tumbled this week on news of the report, including Bitcoin, Ethereum, Litecoin, and Ripple, when it was detailed in a paper in Bloomberg.
The study says manipulation has become prevalent on some decentralized cryptocurrency exchanges (DEXs) and is likely rampant on centralized cryptocurrency exchanges as well. “We have no idea what the scale of embezzlement is on centralized exchanges,” Cornell Tech professor Ari Juels said at a blockchain conference on Cornell Tech’s New York City campus. “If we extrapolate from what we’ve seen on DEXs, it could very well be in the billions of dollars.”
Cryptocurrency Behaviors Mimic Wall Street
The study is appropriately titled “Flash Boys 2.0,” because these trades work much like those in Michael Lewis’s popular book “Flash Boys,” in which traders use high-frequency trading and exploitative market behavior to win trades before slow-moving rivals. In the case of cryptocurrencies, special arbitrage bots move ahead of ordinary users’ trades on decentralized exchanges, according to Bloomberg. These autonomous trading programs allow market manipulators to anticipate the moves of other traders and profit from them. These traders are also able to get priority orders by paying higher fees, allowing them to take advantage of practices including front running, the authors said in the report published last week.
How the Cryptocurrency “Flash Boys” Trade
- Traders use special arbitrage bots to anticipate and profit from the trades of ordinary users.
- Traders pay higher fees to get priority on practices like front running and aggressive latency optimization
- Market exploitative behaviors mimic the common practices of Wall Street’s high-speed traders
Source: Bloomberg
DEX Design Threatens Blockchain Security
While DEXs are not yet the primary method of trading cryptocurrencies, their popularity is increasing as companies like Binance develop their own infrastructure.
“We argue that DEX design flaws threaten the security of the underlying blockchain,” the Cornell Tech report states. “These bots exhibit many of the same exploitative market behaviors (front running, aggressive latency optimization, etc.) common on Wall Street…”
The paper’s authors have been monitoring six decentralized exchanges since October, where they found more than 500 bots generating up to $20,000 a day, according to Bloomberg. The researchers also created their own autonomous trading program to gain deeper insight into how these trades were executed, and even received some buyout offers. “This should incentivize the community to consider new exchange designs,” Cornell Tech’s Juels said.
Looking forward
The study highlights the broader risk of investing in the crypto space. A precedent Bloomberg The story outlined a study that monitored the websites of the top 100 cryptocurrency exchanges and determined that nearly 90% of the volume was suspicious. Despite this, cryptocurrency continues to attract the attention of institutional investors, including Harvard’s massive endowment, which is backing a crypto company.