The Bank for International Settlements, BIS for short, has just published a report in which they have taken a look at mining. And the conclusions they draw were very alarming, to say the least.

The background of mining

In the case, you are not as familiar with mining and what purpose it serves I will go through the basics, not trying to cover every edge case just the basics. The purpose the miner serve are as validators for the transactions on a blockchain, this is called Proof of Work or PoW. In general, people have a bunch of computers competing to solve equations, and the first one to provide the correct answer will then get to validate the transactions on the Blockchain. This is what is known as adding a block.

People can either compete alone, or they can "pool" their resources in what is known as a mining pool. The idea there is strength in numbers. The more computational power the more likely they will find the correct solution. But the downside is you get fewer rewards, but you get them more often.

What the BIS findings say

In the report, BIS has taken a look at ETH in particular, as I understand it. And they have highlighted a pretty severe issue and flaw with the current system. Here is one quote from the report:

Since these intermediaries can choose which transactions they add to the ledger and in which order, they can engage in activities that would be illegal in traditional markets such as front-running and sandwich trades.

In case you like me did not know exactly what those two things mean. I looked it up so let me tell you. Front-running, is when you have advanced information and act on it. It is similar to insider trading. Sandwich trades, are bots programmed to look for trades made by another trader and then place an order for that token as well. The idea is that the bot should be able to execute the trade before the trading human. This pushes the price up. The bot then completes the sandwich by selling the token for the now higher price to the trader.

The main thesis in the report centers around the potential abuse a miner can make simply by having access to the transactions. They see the potential that mined can abuse the system simply by the fact that they get to decide which transactions get put through and in what order. 

The authors speculate that around 1 in 30 transactions on the Ethereum Blockchain is one of these types. Where the miner makes a transaction to directly profit. One way the miners can do this is if they see a large buy or sell order they can insert an order of their own to be executed before the massive order. Taking advantage of the shift in price.

The last takeaway from the report is that, sadly, they see no easy fix to the problem. Because of the pseudo-anonymity that Blockchain technology naturally offers.

Sorry I sort of buried the lead. The paper also suggests that regulators must establish whether mining is illegal and whether current insider trading provisions apply to the activity.

You can find the full report linked down below.

My thoughts on this

Sadly this appears to be one of those features that are looking to be hard to get rid of. And I think it is likely that it will remain even if the validation system is switched. Like in Ethereum's case, where they are planning to switch to a Proof of Stake system, instead of their current PoW system. The same problem with the validators would still exist.

And the same should also be valid for virtually every Blockchain. Not just Ethereum, it just happened to be the one they looked into.

A way to maybe get around that would be to keep the trades separate, and the validators would then only see a number corresponding with a trade, and have no access to the actual trade, then they get to pick the numbers they want in the block and in what order. But I am sure that would have a whole lot of other problems with it.

If it were to be ruled to be illegal, it could almost kill crypto. Ar at least deal it a severe blow. 

But hopefully, there are some smart people that will be looking into fixing this, instead of looking into it to find out how they can take advantage of it. =/

Sadly I think this will happen Wallstreet and financial institutions from wanting to invest in crypto. At least in the short term. Unless news outlets and papers will make a big deal out of this I do not see this affecting the everyday investor. Well, maybe it will affect you after reading about it. 

What are your thoughts on this can of worms? Do you think there is a way in which this sort of under-the-table dealing can be eliminated? Please share your thoughts on this in the comment section down below.

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