Why I will not be investing in Ethereum

Reaper

I don't claim to be a crypto expert but here is my understanding of a problem with Ethereum called MEV which would stop me investing.

When you buy or sell your transaction is bundled up with a bunch of other peoples and given to a Validator (miner) who puts it on the blockchain.

What order will the miner process them? In the order they were made. Er... no. And that's the problem.

Instead they look through them for a suitable target to scam, delaying your transaction as long as they need. Having found one they insert a transaction of their own directly before and afterwards to manipulate the price and make a profit at your expense. It's called a "sandwich attack".

So is the Ethereum foundation trying to stop it? No. It's tricky to do so instead they decided to give up without trying and make money out of it instead. They auction off blocks to the validators to scam. Developers are even adding code to make it easier, with a company called Flashbots leading the charge with their support.

Imagine the police deciding catching criminals was hard. So instead they give up and auction off the right to burgle individual houses. Then they go on to sell crowbars to the burgalars.

This behaviour would not be tolerated if stockbrokers did it with customer orders on the stock market. Now the SEC is becoming more interested in crypto bad times could be ahead for a currency which has theft built into it, and that is why I will not invest in Ethereum or any coin that depends on it. Its long term prospects are poor.

If you want to see theft in action a tool has just been released that lists those found in the last hour at www.zeromev.org

The videos are worth watching to understand how to use the tool. It's not hard.

Malthusian

Imagine the police deciding catching criminals was hard. So instead they give up and auction off the right to burgle individual houses. Then they go on to sell crowbars to the burgalars.

It worked well in Terry Pratchet's Discworld, where the Thieves' Guild are licensed by the Government to commit a socially acceptable quota of crime each year, and unlicensed thieves are brutally punished.

In the real world the police decide catching criminals is hard, so they come up with arbitrary solutions like only investigating burglaries of even-numbered houses.

Would a system of planned and regulated thievery be fairer? People living in even-numbered houses would probably say no, but people living in odd-numbered houses would say yes. Economic theory says it is better for society overall, for the same reason we take out home insurance - pooling of risk.

It is not far off the system we already have with the banks, where banks are now responsible for nearly all frauds (even if you sent the money to the scammer yourself) and the cost of bank fraud is spread across all accountholders.

This behaviour would not be tolerated if stockbrokers did it with customer orders on the stock market.

True, but we're not talking about stockbrokers manipulating the transmission of investments that are ultimately headed to people's pensions, we're talking about sovereign citizens trading computer game land and 8-bit clipart pictures between each other so they can get rich quick. It is expected that the former activity would be subject to heavier regulation.

Olinda99

Not sure the words 'investing' and '<insert your preferred crypto here>' should be used in tjhe same post, let alone in the same title.

Albermarle

I did not fully understand the post, but then maybe I am a bit old school, just investing in pensions/stocks and shares and saving in Premium Bonds 

[Deleted User]

I pulled my money out a week before the current collapse, I won't be going back anytime soon.

masonic

Do ETH miners not, like with BTC, select transactions to include on a block based on the value of the transaction fee offered?

Perhaps you could explain how transactions from one ETH address to another affect the price vs a fiat currency? Perhaps I'm being thick, but its normally the money exchanged between currencies that drives fluctuations in price, rather than moving currency between accounts. The agreement of a price for an exchange precedes the transfer of of the cryptocurrency, so how does delaying the transfer result in them manipulating the price you pay or receive? Even if this were not the case, how does any party other than the one you're exchanging with benefit from you trading at a different price at a different time?

Once the agreed amount of ETH was "sent", i.e. signed transaction broadcast and awaiting inclusion on a block, only an unscrupulous exchange would attempt to renege on it, and could do so with or without the support of some third party trying to delay it being added and confirmed.

Reaper

I'm no expert so if anything doesn't make sense I suggest looking through the documentation that goes with that tool I mentioned, but the following is my understanding.

Gas makes it more appealing to process, but validators have no requirement to process by gas order. Have a look at a block with that tool I mentioned. You can sort it by "Block order" (the actual order processed), "gas order", or "fair order" (transaction time). They are very different.

Although you try to trade for a fixed price it can change after you have committed. That's called "slippage". You could set a tolerance range to limit this but when the market is volatile you might not want to risk your transaction failing by setting it too tight.

Type this block number into the tool to see somebody losing a breath taking $-217372.17 in one hit: 13640275 

masonic

Reaper said:

I'm no expert so if anything doesn't make sense I suggest looking through the documentation that goes with that tool I mentioned, but the following is my understanding.

It's the website you shared that doesn't make sense. It asserts a lot and explains nothing. Lots of hyperlinks that take you round in circles with no nuts and bolts explanation of what the author claims is happening and how. Some links go to wild Twitter threads, which seem to be more of the same. It has the vibe of a crackpot with an axe to grind, but happy to be corrected if there is a detailed explanation somewhere, either by this author or someone else.

Reaper said:

Gas makes it more appealing to process, but validators have no requirement to process by gas order. Have a look at a block with that tool I mentioned. You can sort it by "Block order" (the actual order processed), "gas order", or "fair order" (transaction time). They are very different.

Yes, this is how blockchains tend to work. Gas is the incentive, and a miner would have to forego a larger fee in order to select a lower paying transaction, but are completely free to do so. Those transacting can raise their gas price to prioritise above other transactions, but it is never a guarantee. A typical 5 minute period will see a dozen or so different miners add blocks, so even if one miner takes exception to a particular address, it won't be long before another would come along and pick up the transaction. Of course if the majority of miners were working together to subvert the blockchain, then all kinds of bad things could happen, but I don't think that is what is being suggested.

Perhaps the author of that website sees in inherent unfairness to the freedom of miners to scoop up whichever transactions they fancy to stuff into their newly minted block?

Reaper said:

Although you try to trade for a fixed price it can change after you have committed. That's called "slippage". You could set a tolerance range to limit this but when the market is volatile you might not want to risk your transaction failing by setting it too tight.

This is exactly analogous to placing a large stockmarket order. Most consumer investors will never experience this because the size of order they typically place will not cause a price movement, and can generally be filled immediately at the quoted price. The same is likely true with crypto. It is certainly true if trading peer to peer, and very likely true on a large exchange where there will be quite a lot of transacting off-chain. Off chain transactions can be executed instantly, but require that you are using an exchange provided wallet, which would then require you just to move the proceeds to your private wallet.

Slippage might become an issue if you are wishing to buy or sell for high-4-figure or 5-figure cash sums (ill-advised for more fundamental reasons). In this case, the slippage occurs because the order is difficult to fill, so it has to be filled from bids/offers farther from the mid-price. I fail to see how this is in any way linked to the subsequent settlement of the trade, which occurs after the deal is agreed.

Reaper said:

Type this block number into the tool to see somebody losing a breath taking $-217372.17 in one hit: 13640275

I see the transaction in question, 0xd1729db6fd12.... For that transaction 263 ETH was swapped for some obscure altcoin. The transaction value was $1.07m. The supposed "$-217372.17" loss was because, what, they would have got more obscure altcoin if the transaction had executed 1m43s earlier? Seems highly questionable to me, and not really of relevance to the thread title, which is investing in ethereum rather than swapping 7-figure sums into obscure altcoins. But maybe there is something I am simply not comprehending.

Reaper

One way it can work is if a large transaction is going through (particularly if it is on an obscure coin with limited liquidity as with the previous example). That will affect the price. Knowing that, the miner inserts a large buy order first to get it at the current price, then sells it again immediately afterwards at the higher price for an instant profit.

I believe there are more types of MEV which can affect smaller transactions. However I am just not proficient enough to be able to provide you with explanations.

Although MEV is little known by the public that could be changing. The Bank of International Settlements (owned by the central banks of 63 countries) identified MEV as a significant problem in this recent tweet:

https://twitter.com/BIS_org/status/1537431808903626752

masonic

Reaper said:

One way it can work is if a large transaction is going through (particularly if it is on an obscure coin with limited liquidity as with the previous example). That will affect the price. Knowing that, the miner inserts a large buy order first to get it at the current price, then sells it again immediately afterwards at the higher price for an instant profit.

I believe there are more types of MEV which can affect smaller transactions. However I am just not proficient enough to be able to provide you with explanations.

Although MEV is little known by the public that could be changing. The Bank of International Settlements (owned by the central banks of 63 countries) identified MEV as a significant problem in this recent tweet:

https://twitter.com/BIS_org/status/1537431808903626752

The Twitter post by BIS links to a paper that they wrote that gives a clear explanation of this phenomenon. This is related to ERC20 smart contracts, rather than exchanges from fiat to ETH and vice versa. Smart contracts involve tokens other than ETH itself, run entirely on the blockchain, your intention to perform the trade is broadcast into the public domain in advance of any agreement, and therefore a delay in the transaction could impact the whole contract.

This is different than exchanges involving fiat, or even non-smart contract based exchanges between pairs of crypto, which involve a private agreement and then a subsequent settlement that is not time sensitive. The key point is that the market is separate from the transaction in these trades (analogous to trades made on the stockmarket). Someone "investing in ethereum" itself would therefore not be subject to such issues. It would be those going off into ERC20 token land, doing token swaps, that could experience something like this.

Malthusian

Albermarle said:

I did not fully understand the post, but then maybe I am a bit old school, just investing in pensions/stocks and shares and saving in Premium Bonds 

Imagine if you wanted to buy £1,000 worth of Acme PLC shares to add to your pension. Now imagine your pension provider aggregated all the sales of everyone else wanting to buy Acme shares. They place an order to buy £10 million of Acme shares with a broker. Instead of finding a buyer, the broker first buys a bunch of Acme shares for themselves, knowing that your provider's order of £10 million will move the price upwards. Only then do they put your order on the market, and sell you the shares they bought first for a quick profit. This of course costs you money because you are getting less Acme shares than if the broker had followed "best execution" policy.

This is not a new problem that Ethereum has invented. It is known as "front running" because it used to involve spotting a large client order being carried by hand between traders' desks, and literally running in front of the trader to place your own order before the price moved.

In the world of regulated finance this would be illegal market manipulation and the likely outcome would be prosecution by the Government in which the stockmarket resided, and spending the rest of your life as a shelf-stacker or a vicar.

In the world of crypto it's not because tHe FuTuRe Of MoNeH!

Even if the SEC or another regulator did ban sandwich attacks, it would be a pointless gesture because Ethereum is dEcEnTrAlIsEd and you can launch a sandwich attack from any tinpot country you like. By contrast you can only run a broker that buys and sells Acme PLC shares in the UK under the FCA's aegis (or an equivalent if Acme is listed in other countries).

As regulation is a) impossible and b) anathema to anyone interested in buying Ethereum, the Ethereum Foundation are instead going for the Thieves' Guild solution as discussed above.

Remember when crypto was going to liberate us from greedy bankers manipulating the markets and keeping us poor?