Alleged $25M MEV Exploit by Peraire-Bueno Brothers

On May 15, the U.S. Department of Justice (DOJ) charged two brothers, Anton and James Peraire-Bueno, for allegedly manipulating the Ethereum network to transfer $25 million from maximal extractable value (MEV) bots to themselves. The DOJ indictment describes the brothers’ strategy as maliciously ordering blocks via their Ethereum validators, amounting to wire fraud. This legal action, announced after a grand jury indictment, has sparked a divisive debate within the crypto community.

Critics are split. Some believe the MEV bots were trying to defraud Anton and James, positioning the brothers not as criminals but as victims themselves. Others argue that exploiting poorly written code, as the brothers did, is undoubtedly unethical. Concerns have been raised that the case might set a regulatory precedent, potentially leading to comprehensive oversight of the Ethereum network.

The case’s complexity has tangled the discourse further, with jargon such as “MEV,” “searchers,” “relays,” and “sandwich attacks” confusing many Ethereum users. To better understand the brothers’ alleged actions, it’s crucial to comprehend what maximal extractable value entails. On the Ethereum network, MEV represents the highest possible profit from transaction ordering in a block. Traders often want their transactions prioritized to maximize their returns or avoid unfavorable price changes.

Typically, when a user posts a transaction on Ethereum, it goes to a memory pool (mempool) where it’s visible to the whole network until either canceled or confirmed. This visibility allows other traders to “front-run” the original trade by copying and executing it first, often resulting in the initial trader paying more. One aggressive tactic bots use is the “sandwich attack,” where a bot buys up an asset before the original trade, jacks up the price, and then sells it for profit.

To combat these sandwich attacks, decentralized exchanges often send transactions directly to a select group of block-builders, avoiding the mempool. Some trades still end up in the mempool, making them susceptible. The bot that offers the highest gas fee to validators usually succeeds in front-running the trade, but this is only profitable if the gas fee is lower than the potential earnings.

In the context of the Peraire-Bueno case, it appears the brothers exploited the Flashbots system to swindle $25 million. Flashbots enable MEV bots to conceal their profitable arbitrages until the last moment, preventing copycat actions. This system was used as a double-edged sword in the alleged heist by the brothers.

According to the indictment, Anton and James first set up 16 Ethereum validator nodes and published transactions that seemed like lucrative MEV opportunities. These “bait” transactions enabled them to understand how to get their transactions included in relays’ blocks. When one of their nodes was chosen to produce a block, they deployed “lure” transactions picked up by three searchers, aiming to manipulate the system.

They sent a false signature to the relay after the relay published the block header for the proposed block, tricking it into believing the relay’s block would be confirmed. This fake signature allowed the brothers to reorder the block, and when ultimately confirmed, their reordered block made the searchers’ trades fail, causing their losses and transferring the $25 million to the brothers.

In the DOJ’s view, this act constituted wire fraud. The lure transactions and fake signature were seen as intentional deceptions designed to defraud the MEV bots. As the indictment explains, these acts were considered “material representations” that were knowingly false.

The crypto community’s reaction has been mixed. Some defend the brothers’ actions, criticizing the DOJ for protecting MEV bots that practice sandwich attacks themselves. Notable voices in the crypto space, including Helius Labs’ Mert Mumtaz and TradingStrategy co-founder Mikko Ohtamaa, have expressed skepticism over the charges. They argue it’s hypocritical to criminalize the brothers while allowing MEV bots to exploit regular traders.

Conversely, others support DOJ’s stance, emphasizing that exploiting software flaws for personal gain is inherently illegal. Hudson Jameson from Polygon Labs pointed out that the brothers did more than merely sandwich the bots; they exploited a flaw in the MEV system. This perspective suggests that their actions indeed crossed legal boundaries.

Regardless, the debate underscores a larger issue within the Ethereum network and the crypto world at large. The practice of extracting MEV has always been contentious, and different networks have taken varied approaches to curb what they deem “malicious” practices. While technical fixes like those proposed by Shutter and Neo X exist, there are no recorded instances of victims prosecuting MEV bots for wire fraud, signaling an ongoing and complex ethical debate in the cryptosphere.