Front-running, flash bots and keeping things fair in the crypto market
Decentralized finance (DeFi) has the opportunity to democratize access to financial markets that have typically only been open to the rich and powerful. But, DeFi will only survive and continue to grow if we take steps to ensure things are safe, private and fair for both retail and institutional investors. When faced with predatory market behaviors such as miner extractable value (MEV) and front-running attacks it opens up old wounds to a “Flash Boys” era of traditional finance.
DeFi can and should do better by not allowing the failures of the past to come creeping back into the future. Fortunately, by implementing cryptographic mechanisms that integrate transactional privacy into public blockchains, information can be proven with things such as an order book without being revealed. This seemingly magical mathematical tactic not only shields transactions from the aforementioned behavior but also allows for auditability, all while still preserving the privacy of individual or institutional accounts. This approach will foster a more accessible DeFi industry and provide a more equitable and liquid market for all.
The phrase Flash Boys entered the lexicon after Michael Lewis wrote a very influential book detailing the phenomenon. When we transitioned from the open-outcry trading floor of old Wall Street into a fully electronic trading world, traders immediately started working out new ways to game the system. In short, the earliest tech-savvy brokers used the ultra-fast processing power of modern computer systems to monitor and facilitate high-frequency trades undercutting, or front-running, legitimate incoming trades posted by slower systems. The crypto DeFi equivalent of the Flash Boys is Flash Bots.
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