As I am following along with all the current legal actions taken by the SEC and other agencies. I am starting to see some alarming things that could spell a disaster for Bitcoin and crypto in general. Let me see if I can explain the problems I see.
The BIS report
BIS is short for the Bank for International Settlement, and they are owned by the member states central banks. They say their purpose is to increase financial and monetary cooperation between members. And on top of it, it also acts as a bank for the central banks. But let us get back to the report they put out on June 16th of last year. In it, they take a look at cryptocurrency mining. And their main focus was Ethereum, this was back before the Merge when $ETH switched from Proof of Work, PoW, to Proof of Stake, PoS.
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
There they highlight several things they see as key issues. And these were true for not only $ETH mining but I assume mining in general. And these issues are that in any other financial market would be illegal. I am talking about front-running and sandwich trades or attacks. And the reason why these are illegal is that front-running and sandwich trade both are very similar to insider trading. Where you have information about an upcoming trade, and that allows you to make a trade that takes advantage of this by either buying or selling before the other order takes place. When it comes to sandwich trades it is similar to front-running in that you have information about an upcoming trade. The idea is that the bot should be able to execute the trade before the trading human. This pushes the price up, and the bot then completes the sandwich by selling the token for the now higher price to the trader.
BIS - Bank for International Settlement
The report is centered on highlighting the abuse a miner is able to inflict on the system simply by having access to this information. And they are also highlighting the problem or impact a miner can have on the system even if they do not partake in the above mention two activities. They still get to decide which orders get executed and when. Meaning they can have unforeseen impacts on the system simply by picking and choosing. Even if that is not their intent. Especially if there is a high volume of transactions in the system.
The report also encourages regulators to decide whether mining should be illegal or not. They also tell them to consider if the current insider trading regulations should be applied to the practice of mining as well.
How does their report stack up against reality?
Shortly after the BIS report came out a research paper was published in which they also took a look at Ethereum mining. And they found that it was constantly under attack. This was done primarily by one mining pool F2Pool was shown to more or less have been using "Unkle maker" attacks as far back as the research team looked. They looked back 2 years.
It is where you manipulate the timestamp of a block to allow you to mint the block instead of the competitor, making their block a Unkle Block. An Uncle Block is created as a result of a tie between miners when they are able to solve the equation simultaneously. The tie is then resolved by looking at the difficulty of the blocks. The more difficult block is set at the Parent or main block, and the other Block becomes that Blocks Uncle. And the miner who mints the Parent Block also receives the reward for doing so.
Not only did F2Pools CEO confirm this, he was bragging about it. Also bragging about how he killed a coin back in 2013 by doing similar things. And while he is correct regarding that a system must be able to tolerate being tested.
Then Ethereum switched to PoS, and that took care of most of the problems, right? Not really. Switching to staking instead of mining has not changed how the blocks are "made". And now instead we have MEV bots helping people do the very same front-running and sandwich attacks as was possible back in the PoW days. And I would even guess it is more frequent now as these MEV botts make it much easier.
Why am I worried?
Nothing to be worried about right? I mean it is not like they are doing anything illegal. None of what I have talked about here is in the strict sense illegal. So all is fine, right? Well, personally I think it is a wonder that this part of crypto has not been targeted by the anty crypto Governments or regulators. As this more or less could be a close-and-shut case in pretty much any court I think. I mean we are kind of lucky that the SEC simply has kept its focus on if cryptocurrencies are securities or not. Because I think they would have had a much easier job if they simply went after this sort of stuff instead. And I think the repercussions for crypto as a whole would be far more detrimental than them simply sewing a couple of exchanges.
This could potentially halt Ethereum and every blockchain that have a similar structure to it. Possibly even all of them depending on the extent a given blockchain would be exposed to the possibility of these things. And to be frank, I have no idea what would happen then. Would everything be fine, and the developer simply needs to come up with a "fix" to the problem, make it, and implement it and we are back up again? And how long would that take? They more or less would need to change the foundation of the blockchain. And if we judge by how long time the Merge took we could very well be talking about years here before a fix could be implemented. What would that mean for crypto? Will people then start to sell their wallets instead of their crypto, looking to cash out? And would that more or less mean the entire crypto market will crash when it comes back online again?
Sadly I am unable to answer pretty much any of the numerous questions I have. But if you can then I would love to hear your thoughts on this, and what you think will happen if push comes to shove. And I will end by saying that one does not have to do something simply because you can. Technically there is even a place in the US where you can commit murder without it being illegal. I still do not see a ton of murder happening there.
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