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The darker side of Ethereum & Decentralized Finance

If you’re into the cryptocurrency industry for a while you should be very excited to be a part of it. But it’s not as good and safe as you think.

you earn a few bucks by investing in cryptocurrency and thinking you’re smart. You should re-think because ethereum is not what you think. It’s a “Dark Forest” with opportunities of making money right around the corner.

People are making money from Ethereum in “n” ways that don’t just limit to patient investing or rug-pulls.

 

DEX — A marketplace that allows users to exchange assets in a completely decentralized manner.

Automated market makers (AMM) like uni swap, sushi swap hold reigns over the space.

Uniswap — https://uniswap.org/

Sushiswap — https://sushi.com/

These applications allow users to exchange their funds in a completely decentralized manner.

 

So now comes the real masterminds of ethereum who mine millions of dollars by replicating what you try to do by knowing it before you do. Sounds crazy and hard to understand, Right?

For eg., if you’re walking through NYC and you see a piece of land, people said that a guy is willing to purchase this land for $15M in a week's time. You know that the land there is worth $13.5M. So what you’ll do is, you purchase it before him and sells it to him for $15M pocketing $1.5M in a matter of 1 week.

The same thing happens here in ethereum but in a matter of few seconds and they call it “front-running”.

Every transaction in ethereum will be placed in a waiting line for miners to pick up. This waiting arena is called the “meme pool”. The meme pool will index all the pending transactions and the miners will be picking transactions from the meme pool. Such a place is full of mysteries. Now before knowing that we should know how the gas fee mechanism works in ethereum.

Image: Meme Pool Working

Ethereum gas fee is purely an auction-based mechanism. Those who make the highest bet for the transaction fee get their transaction picked up quickly. So now here comes the tricky part, so most applications use public nodes like Infura where the transaction in meme pool gets mounted up. But with a private node, I could easily read all the information on the meme pool. So before a transaction is executed I could know that and do some event to benefit from the action.

I’ll explain it using a simpler example,

Let’s consider Rarible, an NFT marketplace where people can list and sell their art/graphics. In rarible, there is an auction-based purchase model where the highest bidder wins the tokens. Now art is listed at a price of $100 and it’s only 10 minutes before the ending of the bidding and a user is bidding for $105. I’m frontrunning it by reading the transaction and bid for the same art for $110 and thus his transaction would be reverted by the SC since it’s less than the current bid value. Then subsequently in the next block, I’ll send 2 transactions, I’ll cancel my old bid for $110 and place a new bid for $101 and thus winning the auction. Then I could re-list the same art for $110 and I’m sure that the new person would bid for it. ;)

Image: Rarible Example Explained

 

Sounds like a funny example but we could take a lot from it. Let’s dive a bit more technical.

MEV — Miner Extractable Value. The practice of miners ordering the transactions based on their preferences. This will create a pure revenue opportunities for attackers to hold firm control over the user’s transaction.

Here is an example of a pure revenue opportunity created by an arbitrage bot on token.store a decentralized exchange.

https://etherscan.io/tx/0xc889bd13594f75e4dd824f04f0c2ad03896cb7ec6518df02455e9560367bb9c4#eventlog

Here the attacker bought Free coin at a lower price by clearing the order book and sold the same at a higher price which is pumped by himself, thus netting a total profit of 0.79 ETH in one single transaction.

you earn a few bucks by investing in cryptocurrency and thinking you’re smart. You should re-think because ethereum is not what you think. It’s a “Dark Forest” with opportunities of making money right around the corner.

People are making money from Ethereum in “n” ways that don’t just limit to patient investing or rug-pulls.

 

DEX — A marketplace that allows users to exchange assets in a completely decentralized manner.

Automated market makers (AMM) like uni swap, sushi swap hold reigns over the space.

Uniswap — https://uniswap.org/

Sushiswap — https://sushi.com/

These applications allow users to exchange their funds in a completely decentralized manner.

 

So now comes the real masterminds of ethereum who mine millions of dollars by replicating what you try to do by knowing it before you do. Sounds crazy and hard to understand, Right?

For eg., if you’re walking through NYC and you see a piece of land, people said that a guy is willing to purchase this land for $15M in a week's time. You know that the land there is worth $13.5M. So what you’ll do is, you purchase it before him and sells it to him for $15M pocketing $1.5M in a matter of 1 week.

The same thing happens here in ethereum but in a matter of few seconds and they call it “front-running”.

Every transaction in ethereum will be placed in a waiting line for miners to pick up. This waiting arena is called the “meme pool”. The meme pool will index all the pending transactions and the miners will be picking transactions from the meme pool. Such a place is full of mysteries. Now before knowing that we should know how the gas fee mechanism works in ethereum.

Meme Pool Working

Ethereum gas fee is purely an auction-based mechanism. Those who make the highest bet for the transaction fee get their transaction picked up quickly. So now here comes the tricky part, so most applications use public nodes like Infura where the transaction in meme pool gets mounted up. But with a private node, I could easily read all the information on the meme pool. So before a transaction is executed I could know that and do some event to benefit from the action.

I’ll explain it using a simpler example,

Let’s consider Rarible, an NFT marketplace where people can list and sell their art/graphics. In rarible, there is an auction-based purchase model where the highest bidder wins the tokens. Now art is listed at a price of $100 and it’s only 10 minutes before the ending of the bidding and a user is bidding for $105. I’m frontrunning it by reading the transaction and bid for the same art for $110 and thus his transaction would be reverted by the SC since it’s less than the current bid value. Then subsequently in the next block, I’ll send 2 transactions, I’ll cancel my old bid for $110 and place a new bid for $101 and thus winning the auction. Then I could re-list the same art for $110 and I’m sure that the new person would bid for it. ;)

Rarible Example Explained

 

Sounds like a funny example but we could take a lot from it. Let’s dive a bit more technical.

MEV — Miner Extractable Value. The practice of miners ordering the transactions based on their preferences. This will create a pure revenue opportunities for attackers to hold firm control over the user’s transaction.

Here is an example of a pure revenue opportunity created by an arbitrage bot on token.store a decentralized exchange.

https://etherscan.io/tx/0xc889bd13594f75e4dd824f04f0c2ad03896cb7ec6518df02455e9560367bb9c4#eventlog

Here the attacker bought Free coin at a lower price by clearing the order book and sold the same at a higher price which is pumped by himself, thus netting a total profit of 0.79 ETH in one single transaction.

Image: Arbitrage using front-running

Smart contract transactions are atomic in nature where you can run 2 or more transactions in one single bot that forms the basis of flash loans.

These opportunities are created by Peer-Peer gossip routing of Ethereum nodes. So all participants have all information in the nodes but the earlier participants are advantageous ones.

These kinds of arbitrage front-running bots made $6M in revenue so far YTD. So now it should make you worried about your security in financial freedom where you’re protected by banks for a while. Banks domesticated you but now you’re in a wild forest of finance where there are numerous money-making opportunities but riskier as well. So future would be an age of mathematicians and programmers ruling the entire industry of finance where bankers and deal makers would play a minor role.

Smart contract transactions are atomic in nature where you can run 2 or more transactions in one single bot that forms the basis of flash loans.

These opportunities are created by Peer-Peer gossip routing of Ethereum nodes. So all participants have all information in the nodes but the earlier participants are advantageous ones.

These kinds of arbitrage front-running bots made $6M in revenue so far YTD. So now it should make you worried about your security in financial freedom where you’re protected by banks for a while. Banks domesticated you but now you’re in a wild forest of finance where there are numerous money-making opportunities but riskier as well. So future would be an age of mathematicians and programmers ruling the entire industry of finance where bankers and deal makers would play a minor role.