In May 2023, an unusual legal case emerged involving two brothers accused of defrauding a MEV (Maximal Extractable Value) bot on the Ethereum blockchain. MEV bots exist because transactions within each Ethereum block (processed every 12 seconds) can be ordered based on tips given to validators. Users can pay these tips to prioritise their transactions, which can be helpful for quickly moving assets but can also be exploited to take advantage of other users. All pending transactions are public in the 'mempool' where anyone can see them, leading to various exploitative strategies such as the sandwich attack.
In a sandwich attack, a bot notices a user's pending transaction to buy tokens on a decentralised exchange. The bot then sandwiches two transactions around the user's transaction: first, it buys the same tokens to drive up the price, and after the user's purchase further increases the price, it sells the tokens at a higher price. This practice, akin to front-running in traditional finance, is illegal in regulated markets.
Anton and James Peraire-Bueno, MIT graduates, allegedly exploited this mechanism on May 8, 2023, orchestrating a sophisticated attack that resulted in the theft of $25 million in just 12 seconds. They reportedly set up multiple Ethereum validators and conducted test transactions to understand the behaviour of MEV bots. Once they had enough information, they sprung their trap.
When one of their validators was chosen to process a block of transactions, the brothers executed bait transactions designed to lure the arbitrage bots. The bots, detecting these transactions, tried to front-run them. However, the brothers exploited a bug in Ethereum's consensus mechanism, allowing them to switch their bait buy orders to sell orders just before finalisation. As a result, the MEV bots bought the assets from the brothers at inflated prices, causing a $25 million loss for the bots.
The U.S. Department of Justice (DOJ) charged the Peraire-Bueno brothers with fraud and money laundering, highlighting that their actions compromised the Ethereum blockchain's integrity by manipulating transaction orders within a block. Ironically, the DOJ's charges effectively defend the MEV bots' front-running practices, considered unethical and illegal in traditional finance.
This case underscores the difficulties of applying traditional legal principles to the decentralised finance (DeFi) space. The brothers' actions led to significant financial losses incurred by front-running bots—a practice typically targeted by regulators. This case is one of many upcoming DeFi legal challenges, highlighting lawmakers' complex task in maintaining fair market practices in this new and rapidly evolving domain.
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