Move Aside, Ethereum: The Dark Forest is Coming for Us All
Traditional Finance (TradFi) is no stranger to the term “front-running,” a prohibitive practice where the front-runner profits from exploiting insider knowledge of a future transaction. The wilder plains of Decentralized Finance (DeFi), while still in its infancy, has not escaped such predatory behavior – a common maneuver referred to by cryptocurrency traders is the sandwich attack, where the public transparency of the mempool allows fast-moving attackers to spot a transaction and hijack the order by inserting their own before the trader, selling thereafter for an easy profit. As attacks grow ever more inventive and new value extraction strategies are being discovered each day, this phenomenon has been recognized under the umbrella term Maximal Extractable Value (MEV).
MEV might seem to be written in hypotheticals, but its impact today is very real. Since 2020, MEV has extracted over USD$730 million from users, and the upper boundaries of that figure is only expected to increase with the incredible velocity of DeFi. As it is, the crypto chain of command means that certain actors have always been in a better position to act on such information. Block producers, for instance, decide the inclusion and order of transactions. In turn, this powerful predator-prey dynamic has inspired users to coin the fiercely adversarial DeFi landscape The Dark Forest. In this unforgiving environment, the new financial order being rapidly assembled appears to come with a warning sign: Are we moving further away from the financial vision of Web 3.0 with each step of the journey?
It is clear that Web 3.0 rejects fundamental premises of legacy finance, a system wired on financial self-preservation and capital-gated trust. By doing away with moated islands where power and access are amassed in the hands of the few, a new networked economy run on global protocols is being built, and progression in this shiny decentralized world must be held up in the shape of a level playing ground; in provable fairness; and in economic democracy. Users anticipate a new wave of economic freedom, with the ability to move assets across different chains and layers with minimal friction. Digital communities set expectations of applications owned collectively by themselves instead of being “rekt”. Developers who disregard these will lose their badge of mainstream relevance, quickly accruing only mercenary followings of gamblers.
The core of DeFi has always been the simple but ruthless pursuit for efficiency and yield, and yet the ideological promise of Web 3.0 cannot be discarded as an afterthought in this never-ending quest. Blockchain must not be reduced to game-theoretic economics. Solutions to tackle MEV must not weaponize preferential treatment of privileged actors over others. Current methods to curb MEV must not favor traders who have more skin in the game. While exploitation of non-public information has been pruned by vigorous defensive mechanisms maintained in the traditional realm of TradFi, DeFi has not had the same luxury of time nor experience. In place of regulatory oversight, we must encourage technical clarity, and build blockchain protocols that do their part in ensuring that transactions are ordered fairly, illuminating the Dark Forest without underestimating its inherent danger.
As crypto continues to rise in the world, MEV will no longer be constrained to any one chain. If anything, technical meritocracy and exploding user activity only balloons the risk of financial contagion spilling over from one blockchain ecosystem to another. In a live-fire environment where blockchains are hardened by constant attacks, XATA as Fair Liquidity Provisioning is an example of how a multi-chain, lightweight solution can create an unbiased, front-running free zone with a fully private protocol design. In the immediate term, users benefit from and contribute to fair trading flow; in the long run, decentralized exchanges are able to share users and volume in a moderated and constructive manner, engaging in healthy competition to push the envelope for DeFi.
Today, most of MEV activity is being captured on Ethereum. Tomorrow, this could very well happen on any other network as our multi-chain universe matures. Navigation in this hostile landscape is buffered only by the fact that the new crypto world being put together shares a different intellectual and economic lineage from its predecessor. Economic fairness was the scarcest resource of the previous Web 1.0 and 2.0 eras, but we know that past behavior is not predictive of the future. If the Dark Forest is a looming eventuality, XATA represents a significant inflection point in how the arc of technology can bend towards decentralized, principled, and bottom-up capitalism in due course. It is this – the original purpose of Web 3.0 – that makes the premise of DeFi such a compelling one. As Web 3.0 outgrows its progenitor with the fullness of time, it is not enough that we fight the monsters in the Dark Forest. It is imperative that we do not become monsters ourselves.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.