Flashbots Blacklists Wallets Swept Up in Tornado Imbroglio
U.S. Sanction of Crypto Mixer Prompts MEV Defense Platform to Open Source
By: Samuel HaigDive
On Aug. 17, Hasu, the strategy lead at crypto firm Flashbots, confirmed the project is blacklisting wallets sanctioned by the U.S. Treasury Department, sparking outcry from the Ethereum community.
On the same day, Flashbots announced it would hasten open-sourcing some of its code in response to the U.S. Treasury’s sanction of the Tornado Cash protocol last week.
Flashbots specializes in addressing MEV, or Maximal Extractable Value, a maneuver in which validators manipulate the order of on-chain transactions to pocket profits by taking advantage of price differences. It’s an arbitrage trading strategy made possible by decentralized blockchains.
Flashbots open-sourced some of its MEV-Boost code in response to the sanctions, highlighting that its U.S.-based team must comply with the legislation. Flashbots said the move will encourage competitions and mitigate a potential single point of failure.
‘The Right Move’
DeFi members welcomed Flashbots’ decision. MakerDAO delegate, raphbaph, said it was “the right move.” Others were’t so thrilled. Twitter user, WazzCrypto, remarked that the Ethereum community “was all about decentralization till a dev got arrested [and] suddenly everyone turned into OFAC compliant NPCs.”
Flashbots hosts private channels that prevent Ethereum users’ transactions from being viewed in a public mempool, protecting them against attacks designed to extract MEV. Flashbots also distributes profits generated through MEV to validators, alleviating the gas wars between MEV bot operators that congested the network prior to its launch in 2020.
The enforcement action taken by the U.S. Treasury’s Office of Foreign Assets Control (OFAC) to blacklist 38 addresses associated with Tornado Cash, followed by the arrest of one of the protocol’s developers in the Netherlands, sent shockwaves across the Ethereum ecosystem and thrust the issue of censorship on the network to the forefront.
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Now both centralized and decentralized teams are scrambling to avoid running afoul of the sanctions, calling into question the web3 ethos of decentralization and censorship-resistance.
Leading projects Aave, Uniswap, dYdX, and Balancer have all blocked the sanctioned addresses from interacting with their protocols.
The major centralized stablecoin issuer, Centre, also froze addresses holding 75,000 USDC after the news broke last week. MakerDAO, the protocol behind the highly USDC-backed DAI stablecoin, is now discussing ways to minimize its reliance on the centralized stablecoin in response.
MEV-Boost is designed to alleviate the effects of MEV once Ethereum has transitioned to Proof of Stake. Flashbots estimates that node operators running its MEV-Boost software can increase their earnings by 75%.
MEV-Boost works by separating block proposers from network validators to make it harder for the latter to extract profits through MEV.
Flashbots is licensing MEV-Boost under the Affero General Public License, which requires developers working on their own versions of an open-source software to build in an open and transparent manner.
“We encourage all teams to develop their relays in the open, and for community members to trust relays only if they act consistent with AGPL norms of transparency and free software,” Flashbots said.
Flashbots emphasized that its MEV-Boost code is an accelerated release and warned that it will be subject to significant changes.
The community is divided in response to the news, with onlookers lobbing both criticisms for adhering to the sanctions and praise for open-sourcing MEV-Boost towards Flashbots.
Twitter user, ylv_io, described Flashbots’ compliance with OFAC as “disappointing.” DuckDegen chimed in with “RIP Flashbots.” Prominent crypto influencer, ChainLinkGod, sarcastically called Flashbots’ software “OFAC-boost.”
Meanwhile, Jesse Pollak, a senior director of engineering at Coinbase, praised Flashbots for open-sourcing MEV-Boost, tweeting “incredible – thank you for your leadership.”
DCinvestor.eth joined in, posting “great work guys, much respect.”
But others claim that Flashbots has only open-sourced part of the MEV-Boost code.
GimpCrypto commented that MEV is extracted through block building rather than relaying. “The block building code is not open-sourced and few are going to be able to compete with [Flashbots] on this,” they said.
Quentinc137 said Flashbots’ announcement is very misleading. “Is there a spec for the Flashbots searcher relay/API so other block builder relays can follow suit?” they asked. “Is the plan to keep the builder — searcher part of the protocol closed source?”
‘Trading God Mode’
The increasing popularity of decentralized exchanges since the ‘DeFi Summer’ of 2020 ushered in a surge in the prevalence of MEV extraction.
0x co-founder, Will Warren, describes MEV as “trading God mode” due to the scale of profits that can be extracted using MEV techniques.
In a recent appearance on The Defiant Podcast, Warren said that 0x-powered exchanges lost $27M lost to MEV in a single month prior to the launch of features designed to protect traders against MEV. He cited the findings from an analysis of more than 700,000 transactions that found traders are losing 20 basis points on average per transaction to MEV-induced slippage.
“The bots are on top of every single transaction where it’s possible to pull this off,” Warren said. “If your transaction can be sandwiched, there’s gonna be a bunch of bots competing to sandwich it every time.”
Flashbots representatives did not respond to requests for comment.