According to a new study undertaken by experts at Cornell Tech and other colleges, “Flash Boys”-style trade manipulation is growing more common in the fledgling cryptocurrency market and is expected to be worth billions of dollars. When the research was described in a Bloomberg piece this week, four of the five major cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and Ripple, fell.
Manipulation has become common on some decentralized cryptocurrency exchanges (DEXes), according to the study, and is expected to be common on centralized crypto exchanges as well. During a blockchain seminar at Cornell Tech’s New York City campus, Ari Juels, a lecturer, said, “We have no notion what the degree of the misconduct on centralized exchanges.” “Based on what we’ve observed on DEXes, it could well be in the billions of dollars range.””
Cryptocurrency Behaviour Is Similar To That Of Wall Street
The study’s title, “Flash Boys 2.0,” is apt because these trades are similar to those described in Michael Lewis’ book “Flash Boys,” in which traders utilize high frequency trading and market exploitation techniques to win trades ahead of slower competitors. Special arbitrage bots jump ahead of ordinary customers’ trades on decentralized exchanges in the crypto world, according to Bloomberg. Market manipulators can profit from other traders’ actions by using these self-driving trading systems. These traders can also pay greater costs to receive priority ordering, allowing them to engage in tactics such as front running, according to the authors of a research released last week.
How Do Crypto ‘Flash Boys’ Make Money?
Traders utilize arbitrage bots to anticipate and profit from the trades of ordinary customers.
Traders pay a greater charge to have front-running and aggressive latency optimization tactics prioritized.
Market-taking tactics are similar to those used by high-speed Wall Street traders.
Blockchain Security is jeopardized by the DEX design.
DEXes are becoming more popular as firms like Binance build out their own infrastructure, despite the fact that they are still not the primary way of bitcoin trading.
The Cornell Tech research states, “We explain how DEX design issues affect underlying blockchain security.” “These bots exhibit many of the same market-exploiting behaviors seen on Wall Street, such as front-running, aggressive latency optimization, and so on…”
According to Bloomberg, the authors of the article have been tracking six decentralized exchanges since October, where they discovered over 500 bots making up to $20,000 every day. The researchers also built their own autonomous trading program to gain a better understanding of how these deals were carried out, and they were even approached with buyout proposals. “This should encourage others to think about different exchange designs,” Cornell Tech’s Juels said.
The study emphasizes the larger dangers of investing in the cryptocurrency market. An earlier Bloomberg piece detailed a study that looked at the websites of the top 100 crypto exchanges and found that over 90% of the volume was questionable. Despite this, institutional investors are becoming interested in cryptocurrencies, including Harvard’s large endowment, which is funding a crypto-company.