Frances Coppola: Ethereum, Dark Forests and the Limits of Transparency

“The mempool is a dark forest,” proclaims Ryan Sean Adams, author of the Bankless newsletter. And keep painting a picture of a dangerous place full of predators – referee robots, front-runners and the like:

“They hide in the mempool waiting to attack. They monitor all transactions with the intention of exploiting them. What if profitable opportunities arise? They leap. “

Scary stuff. There is only one problem. What Adams describes is not a dark forest. It is an illuminated plain.

Crypto markets are enlightened markets, by definition. Thus predators can see the prey arrive. The prey can see them too, but the prey cannot escape. When you submit an Ethereum transaction, it has to wait in that mempool until a miner picks it up. He has nowhere else to go. So it is, to coin a phrase, a “sitting duck”. Any predator in the pool can see it. It is inevitably replicated, front-run or otherwise stolen. The wonder is that any legitimate transactions are ever verified.

Perhaps, instead of a dark forest, we should think of the mempool as a desert. The sun is shining relentlessly and there is nowhere to hide. And it’s infested with snakes. A recent BBC documentary filmed small iguanas emerging from their eggs in the blinding light of the desert floor, then running the gauntlet of a myriad of snakes.

While they could outrun snakes, few of them made it: they were continually attacked and a misstep or uncertain step was fatal. Few managed to reach the heights that snakes could not reach. The wonder is that someone did it.

See also: Frances Coppola – Banks Are Toast but Crypto has lost its soul

This, in my opinion, is more like mempool. A desert, blindingly lit and infested with predators. But unlike small iguanas, Ethereum transactions can’t get past snakes.

You might think that if the little iguanas – or Ethereum transactions – can’t get past the snakes, they don’t deserve to survive. After all, it’s survival of the fittest, isn’t it? No doubt snakes see it this way. After all, they are only interested in a free lunch. They would happily kill and eat all the iguanas.

But this is not smart. Smart snakes would understand that some of the iguanas have to survive, not because iguanas are important, but because snakes do. When the surviving iguanas become adults, they will return to that place to lay their eggs, thus ensuring a future supply of free lunches for the snakes and their offspring.

Likewise, if some Ethereum transactions go through without being front run, copied or stolen, people will continue to issue Ethereum transactions. But if the snakes kill and eat all the little iguanas, there will be no adults to lay eggs. And if mempool predators gobble up all or nearly all Ethereum transactions, people will stop using Ethereum. There will be no more free lunches. All the snakes that will have to eat are each other.

Every human system somehow replicates the natural world, and cryptography is no exception. Relentless transparency makes markets inefficient and socially unproductive, as legitimate investors are displaced by speculators. Legitimate investors need to find ways to hide from speculators or outsmart them. If they don’t, there will ultimately be no legitimate investors, only arbitrage will attempt to outdo each other. The ecosystem will feed on itself.

So there is a need for “safe spaces”. Dark places, protected from the eyes of predators. Small creatures lurk safely in their dark lairs when the hawk is flying. Mammals and marsupials create safe indoor spaces for their young. Birds create safe spaces in their nests. Reptiles create safe spaces by burying their eggs. Security is in the dark. Illuminated places are dangerous places.

See also: Frances Coppola – Mr. Powell, If you want higher inflation, give people money

Yet… .. even dark places are dangerous. Predators in lighted markets have to be very quick to outrun their prey; but predators in dark markets don’t need speed. All they have to do is hide in the shadows waiting for a tasty meal to pass their way. A dark market that allows predators to enter is not a safe place for legitimate investors.

When conventional “enlightened” markets were invaded by HFT robots, investment banks offered large investors “dark pools” where they could trade with each other without the risk of being algorithm-driven. But Barclays allowed HFT robots to enter its dark pool, where they are happily at the forefront of unsuspecting investors who thought they were safe. Eventually Barclays was captured and forced to drain his dark pool. In 2016, she was fined $ 70 million for fraud. It wasn’t the only big bank that accepted money from big investors to protect them from HFT bots and money from HFT traders to give them access to the investors it was supposed to protect.

Crypto transparency should have eliminated the need for trusted third parties like Barclays. But if transactions can’t clear the mempool without being on the line, copied or stolen, people will inevitably try to find ways to escape the mempool. These ways are likely to involve trusted third parties, though perhaps not investment banks.

In “Ethereum is a Dark Forest”, DeFi investors Dan Robinson and Georgios Konstantopoulos describe how they tried to overcome the snakes in the mempool. Unfortunately, they only managed to draw attention to the money they were trying to claim, which obviously hadn’t been claimed by anyone else because everyone knew the snakes would come first.

Robinson and Konstantopoulos provided some useful advice for would-be iguanas, most notably “snakes are real” (although they call them “monsters”) and “stick to plan”. But it was this paragraph that caught my attention:

“Even better, if you happen to know a miner (we didn’t know him), you could have them include the transaction directly in a block, bypassing the mempool – and the monsters – altogether.”

A trusted third party could parachute their iguana directly onto the top of the rocks.

See also: Stablecoin Surge is built on smoke and mirrors

There is clearly a profit opportunity here for the miners. Some are already exploiting it without a doubt. But those who would rely on the helping hands offered by seemingly friendly miners may want to remember what happened to investors who trusted Barclays.

After all, it is the survival of the fittest, in the world of cryptocurrencies. And no one will prosecute a miner for fraud if you pay him to withdraw your exchange early, but delay long enough to be on the front line. In the world of cryptocurrencies, even more than in conventional markets, there is no “trusted third party”. If you trust someone, you will probably be ripped off.

The cryptocurrency world has shunned trust in favor of transparency. But transparency does not solve the problem of unreliability in the financial markets. There may be no trusted third parties in fully enlightened markets, but there is no protection from predators either. Now, the cryptocurrency world seems to be turning back towards trust. But in a world where the dog eats the dog or the snake eats the iguana – who can you really count on?