Bad Precedent or Security Response?

Tether, the issuer of the leading stablecoin Tether USD (USDT), has blacklisted a validator address responsible for the $25 million drain on Maximal Extractable Value (MEV) bots last week.

The validator exploited a bug in the MEV-boost relay, bypassing MEV bots by attempting to execute a sandwich trade. Sandwiching trades involve a process in which an order is placed immediately before another trade, and then right after it. In effect, this process simultaneously front-runs and back-runs an originating transaction, on the condition that its verification status is still pending.

The $25 million exploit can be traced to the rogue validator, who back-ran the MEV transaction. The total amount was aggregated across various crypto assets, including USDT, ETH, DAI, Wrapped ETH, and Wrapped BTC. Blockchain explorer Etherscan has already flagged the address involved. The rogue validator’s USDT address held roughly $3 million for USDT and $21 million from a mix of ERC-20 tokens. Tether then promptly blacklisted the validator address.

The blacklisting decision by Tether has drawn criticism for being similar in tone to censorship. Kraken developer and Cryptowatch founder Artur reacted to the initial disclosure by blockchain analyst ZachXBT on Twitter:

that’s bs, mev bots take advantage of mfers and it’s all good but someone does it to them and they get blacklisted?!

— Artur (@tmuxvim) April 10, 2023

Jaynti Kanani, co-founder at Polygon chimed in on the matter, saying that the move was a bad precedent. Jordan Hagan, co-founder of Fastlane Labs also opined on the blacklisting:

“This is the most concerning DeFi development of 2023. The bot “victims” signed those transactions and sent them to the relay. They were executed. The exploit wasnt in DeFi. Tether’s block implies they have an opinion on eth’s consensus / social layer.”

Bad Precedent or Swift Response?

It appears to many in the crypto space that Tether’s exercise of blacklisting over the Beacon Chain (its consensus layer) implies that it has a sizable influence and control over the chain, and predicates such decisions based on its predilections.

MEV (Maximal Extractable Value) bots profit by leveraging information about transactions about to be executed, often using arbitrage to capitalize on price differences between exchanges. These bots front-run trades, purchasing currency slightly cheaper than other traders, which has led to their practices being viewed as a form of “invisible” tax.

This profit, as automated, leverages transactional info, specifically from decentralized finance platform. With the availability of this information, MEV bots seize the opportunity to front-run trades and arbitrage price differences between decentralized exchanges, resul;ting in extracting value from traders. To date, 27 Ethereum-based projects joined forces to launch MEV Blocker, aiming to minimize the value extracted from traders by MEV bots.

Tether’s decision to blacklist the exploiter could be seen as a necessary security measure. The company aims to protect its users and maintain the integrity of the USDT stablecoin by preventing bad actors from profiting off exploits and vulnerabilities in the DeFi ecosystem. By blacklisting the exploiter, Tether sends a clear message that it will not tolerate any malicious activities in the space and will take steps to safeguard its users’ assets.

On the other hand, it can be argued that Tether‘s actions may set a “bad precedent” (as Kanani sees) for regulatory and policy-related implications. By blacklisting the address, Tether effectively exercises its authority to censor transactions, which could be seen as a centralizing force in an ecosystem that is meant to promote decentralization. This raises concerns about the potential abuse of power by centralized entities, such as Tether, and the implications this might have on DeFi.

In the past, Tether has shown reluctance to cooperate with law enforcement based on concerns of user privacy. The firm has also been mired for its association with Bitfinex, which faced criminal investigations by the U.S. Department of Justice.

It can also be argued that MEV bots themselves engage in questionable practices by exploiting the inherent vulnerabilities or spaces for experimentation from blockchain systems. This idea means that the rogue validator was merely leveling the playing field, or extracting some form of retribution against the bots. What does this mean? Does it mean that Tether’s blacklisting was an exercise of double standards?

The issue of MEV bots and Tether’s blacklisting decision presents a complex situation with no easy answers. While Tether’s actions may be necessary for maintaining security and stability within the DeFi ecosystem, it also raises questions about the potential risks of authoritarian actions from centralized entities.

This also opens the floor to debate: does the crypto industry need a more comprehensive approach to address the underlying issues related to MEV bots and other exploits in the space? Perhaps it does, but the question is when.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice. Opinions stated herein are solely of the author’s, and hence do not represent or reflect CryptoDaily’s position on the matter. The author has no influential stakes in any of the digital assets and securities mentioned, and does not have any significant hold of or own any cryptocurrency or token discussed.