11 research outputs found
The Potential of Self-Regulation for Front-Running Prevention on DEXes
The transaction ordering dependency of the smart contracts building
decentralized exchanges (DEXes) allow for predatory trading strategies. In
particular, front-running attacks present a constant risk for traders on DEXes.
Whereas legal regulation outlaws most front-running practices in traditional
finance, such measures are ineffective in preventing front-running on DEXes due
to the absence of a central authority. While novel market designs hindering
front-running may emerge, it remains unclear whether the market's participants,
in particular liquidity providers, would be willing to adopt these new designs.
A misalignment of the participant's private incentives and the market's social
incentives can hinder the market from adopting an effective prevention
mechanism.
We present a game-theoretic model to study the behavior of traders and
liquidity providers in DEXes. Our work finds that in most market
configurations, the private interests of traders and liquidity providers align
with the market's social incentives - eliminating front-running attacks.
However, even though liquidity providers generally benefit from embracing the
market that prevents front-running, the benefit is often small and may not
suffice to entice them to change strategy in reality. Thus, we find that inert
liquidity providers might require additional incentives to adopt innovative
market designs and permit the market's successful self-regulation
DeFi Lending During The Merge
Lending protocols in decentralized finance enable the permissionless exchange
of capital from lenders to borrowers without relying on a trusted third party
for clearing or market-making. Interest rates are set by the supply and demand
of capital according to a pre-defined function. In the lead-up to The Merge:
Ethereum blockchain's transition from proof-of-work (PoW) to proof-of-stake
(PoS), a fraction of the Ethereum ecosystem announced plans of continuing with
a PoW-chain. Owners of ETH - whether their ETH was borrowed or not - would hold
the native tokens on each chain. This development alarmed lending protocols.
They feared spiking ETH borrowing rates would lead to mass liquidations which
could undermine their viability. Thus, the decentralized autonomous
organization running the protocols saw no alternative to intervention -
restricting users' ability to borrow.
We investigate the effects of the merge and the aforementioned intervention
on the two biggest lending protocols on Ethereum: AAVE and Compound. Our
analysis finds that borrowing rates were extremely volatile, jumping by two
orders of magnitude, and borrowing at times reached 100% of the available
funds. Despite this, no spike in mass liquidations or irretrievable loans
materialized. Further, we are the first to quantify and analyze
hard-fork-arbitrage, profiting from holding debt in the native blockchain token
during a hard fork. We find that arbitrageurs transferred tokens to centralized
exchanges which at the time were worth more than 13 Mio US$, money that was
effectively extracted from the platforms' lenders
Ethereum Proof-of-Stake Consensus Layer: Participation and Decentralization
In September 2022, Ethereum transitioned from Proof-of-Work (PoW) to
Proof-of-Stake (PoS) during "the merge" - making it the largest PoS
cryptocurrency in terms of market capitalization. With this work, we present a
comprehensive measurement study of the current state of the Ethereum PoS
consensus layer on the beacon chain. We perform a longitudinal study of the
history of the beacon chain. Our work finds that all dips in network
participation are caused by network upgrades, issues with major consensus
clients, or issues with service operators controlling a large number of
validators. Further, our longitudinal staking power decentralization analysis
reveals that Ethereum PoS fairs similarly to its PoW counterpart in terms of
decentralization and exhibits the immense impact of (liquid) staking services
on staking power decentralization. Finally, we highlight the heightened
security concerns in Ethereum PoS caused by high degrees of centralization
DeFi and NFTs Hinder Blockchain Scalability
Many classical blockchains are known to have an embarrassingly low
transaction throughput, down to Bitcoin's notorious seven transactions per
second limit.Various proposals and implementations for increasing throughput
emerged in the first decade of blockchain research. But how much concurrency is
possible? In their early days, blockchains were mostly used for simple
transfers from user to user. More recently, however, decentralized finance
(DeFi) and NFT marketplaces have completely changed what is happening on
blockchains. Both are built using smart contracts and have gained significant
popularity. Transactions on DeFi and NFT marketplaces often interact with the
same smart contracts. We believe this development has transformed blockchain
usage. In our work, we perform a historical analysis of Ethereum's transaction
graph. We study how much interaction between transactions there was
historically and how much there is now. We find that the rise of DeFi and NFT
marketplaces has led to an increase in "centralization" in the transaction
graph. More transactions are now interconnected: currently there are around 200
transactions per block with 4000 interdependencies between them. We further
find that the parallelizability of Ethereum's current interconnected
transaction workload is limited. A speedup exceeding a factor of five is
currently unrealistic.Comment: 22 pages, 12 figures, to be published in Financial Cryptography and
Data Security (FC), May 202
Ethereum's Proposer-Builder Separation: Promises and Realities
With Ethereum's transition from Proof-of-Work to Proof-of-Stake in September
2022 came another paradigm shift, the Proposer-Builder Separation (PBS) scheme.
PBS was introduced to decouple the roles of selecting and ordering transactions
in a block (i.e., the builder), from those validating its contents and
proposing the block to the network as the new head of the blockchain (i.e., the
proposer). In this landscape, proposers are the validators in the
Proof-of-Stake consensus protocol who validate and secure the network, while
now relying on specialized block builders for creating blocks with the most
value (e.g., transaction fees) for the proposer. Additionally, relays play a
crucial new role in this ecosystem, acting as mediators between builders and
proposers, being entrusted with the responsibility of transmitting the most
lucrative blocks from the builders to the proposers.
PBS is currently an opt-in protocol (i.e., a proposer can still opt-out and
build their own blocks). In this work, we study it's adoption and show that the
current PBS landscape exhibits significant centralization amongst the builders
and relays. We further explore whether PBS effectively achieves its intended
objectives of enabling hobbyist validators to maximize block profitability and
preventing censorship. Our findings reveal that although PBS grants all
validators the same opportunity to access optimized and competitive blocks, it
tends to stimulate censorship rather than reduce it. Additionally, our analysis
demonstrates that relays do not consistently uphold their commitments and may
prove unreliable. Specifically, there are instances where proposers do not
receive the complete value as initially promised, and the censorship or
filtering capabilities pledged by the relay exhibit significant gaps
SoK: Preventing Transaction Reordering Manipulations in Decentralized Finance
User transactions on Ethereum's peer-to-peer network are at risk of being
attacked. The smart contracts building decentralized finance (DeFi) have
introduced a new transaction ordering dependency to the Ethereum blockchain. As
a result, attackers can profit from front- and back-running transactions.
Multiple approaches to mitigate transaction reordering manipulations have
surfaced recently. However, the success of individual approaches in mitigating
such attacks and their impact on the entire blockchain remains largely
unstudied.
In this systematization of knowledge (SoK), we categorize and analyze
state-of-the-art transaction reordering manipulation mitigation schemes.
Instead of restricting our analysis to a scheme's success at preventing
transaction reordering attacks, we evaluate its full impact on the blockchain.
Therefore, we are able to provide a complete picture of the strengths and
weaknesses of current mitigation schemes. We find that currently no scheme
fully meets all the demands of the blockchain ecosystem. In fact, all
approaches demonstrate unsatisfactory performance in at least one area relevant
to the blockchain ecosystem
Base Fee Manipulation In Ethereum's EIP-1559 Transaction Fee Mechanism
In 2021 Ethereum adjusted the transaction pricing mechanism by implementing
EIP-1559, which introduces the base fee - a fixed network fee per block that is
burned and adjusted dynamically in accordance with network demand. The authors
of the Ethereum Improvement Proposal (EIP) noted that a miner with more than
50% of the mining power might have an incentive to deviate from the honest
mining strategy. Instead, such a miner could propose a series of empty blocks
to increase its future rewards.
In this paper, we generalize this attack and show that under rational player
behavior, deviating from the honest strategy can be profitable for a miner with
less than 50% of the mining power. Further, even when miners do not
collaborate, it is rational for smaller mining power miners to join the attack