Crypto
Researchers uncover vulnerabilities leading to predatory trading in popular Ethereum cryptocurrency rollups
Ethereum, a decentralized online platform that allows users to conduct financial transactions in Ether cryptocurrency, prides itself on the system’s high security.
But new findings from Northeastern University’s computer scientists and researchers at ETH Zurich, a public research university in Switzerland, show that it might not be so bulletproof, and its users might be susceptible to some market participants’ predatory practices.
“There are direct monetary incentives,” says Ben Weintraub, a Northeastern doctoral student in the Khoury College of Computer Sciences. “So in my view, it’s better if researchers find and publicize it first before people mistakenly lose money.”
Weintraub presented the paper on the findings at the Association for Computing Machinery’s annual Conference on Computer and Communications Security (ACM CCS 2024) held Oct. 14–18 in Salt Lake City. The study is available on the arXiv preprint server.
He and his co-authors conducted a large-scale analysis of exploitative trading activities on Ethereum itself and across so-called rollups, or off-the-platform services that allow faster processing of higher volumes of transactions.
The researchers found evidence that certain actors can manipulate the market on rollups, which was previously thought to be impossible.
“It was known to be possible on regular Ethereum, but it was thought to be impossible on rollups and we showed that it is not impossible,” Weintraub says.
The paper presents three novel types of attacks in which predatory traders could have made about $2 million in profits in the last three years by manipulating transactions within Ethereum trading networks.
Ethereum is a network of independent computers across the world that follows the Ethereum protocol—a set of rules on how the computers in the global network can interact with each other. It uses blockchain technology, pioneered by Bitcoin.
A blockchain is a database of transactions that is shared across computers in a network. Once a new block, or a new set of transactions, is added to the blockchain, that data can no longer be removed by anybody, primarily due to cryptographic techniques that highlight any attempts at tampering.
Anyone can create an Ethereum account from anywhere, at any time. No central authority such as a government or a company has control over Ethereum, which means no individual can change the rules or restrict users’ access. Any Ethereum protocol changes require approval from more than half of the network.
Unlike Bitcoin, which is solely a payment system with a name-sake cryptocurrency, Ethereum allows users to build applications, communities and organizations on its platform.
The Ethereum network, however, has a scalability problem—as the number of people using it has grown, the blockchain has reached certain throughput limitations that further inflated the costs for conducting transactions on the platform.
One solution are the rollups, such as Arbitrum, Optimism and zkSync—which were analyzed by Weintraub—that aim to improve Ethereum’s speed by taking batches of transactions and calculations off Ethereum. This reduced the processing cost of a transaction to roughly 1 cent, Weintraub says.
Some actors make profits trading cryptocurrencies by trying to achieve maximal extractable value, he says, by manipulating the order of transactions that are pending inclusion on the blockchain. The research provides exclusive insights into the volume of maximal extractable value transactions on rollups, costs associated with them, profits made by such exploitative traders, competition between them and response time to such activities across Ethereum and the rollups.
Some methods that malicious actors use are common to financial markets, like arbitrage, when a user buys something on one exchange and quickly sells it for profit on another exchange.
“It’s generally thought to be a good thing because it keeps different exchanges balanced in terms of price,” Weintraub says. “But there are also types [of maximal extractable value] that are not good. One that’s fairly well-known in research is called sandwiching.”
In sandwiching, when a speculator sees someone is about to buy an asset, they buy it first, driving up the price. The speculator then quickly sells it at the higher price.
Sandwiching is considered a “bad,” manipulative trading strategy affecting the price that other traders get. On Ethereum, block producers—people or groups who get paid when their hardware is randomly selected to verify a block’s transactions—can try to maximize the amount of profit they make by manipulating how transactions are ordered or included in a block before it is added to the blockchain.
“The reason we call this an attack is because it is purely damaging to that victim, who now has to pay a little bit more for their transaction,” Weintraub says. “The system broadly does not benefit at all. There’s just the one who profits—the ‘sandwicher.’”
While the researchers didn’t find traditional sandwich attacks on popular rollups, they identified three potential strategies for them when transactions move between Ethereum and rollups with a time delay.
“This just came from analyzing the protocol and looking at the exact flow of transactions—when they get sent, when the rollup seems to respond to them or when they end up on the blockchain,” Weintraub says.
“We tested our attacks on [Ethereum’s] test-net, a network of ‘fake’ money that is used by developers to test their applications,” he says. “And, essentially, we stole all of the money from only ourselves.”
Weintraub is currently in contact with major rollups’ developers to see what can be done about the possibility of the attacks. Two types of these novel attacks can be prevented, Weintraub says, while it is unclear how to protect users from the third type.
“Our view is that it’s better to just get this information out there so people, at least, are aware of the risks,” he says.
More information:
Christof Ferreira Torres et al, Rolling in the Shadows: Analyzing the Extraction of MEV Across Layer-2 Rollups, arXiv (2024). DOI: 10.48550/arxiv.2405.00138
arXiv
Northeastern University
This story is republished courtesy of Northeastern Global News news.northeastern.edu.
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The largest token changed hands at US$96,200 as of 2pm Friday in Hong Kong, partly paring a retreat of almost 3 per cent from a day earlier. Smaller rivals including ether and dogecoin, a favourite of the meme crowd, oscillated in tight ranges.
The crypto market is also braced for the expiry of a substantial quantity of bitcoin and ether options contracts on Friday – one of the biggest such events in the history of digital assets, according to prime broker FalconX.
The notional value of the bitcoin contracts on the Deribit exchange – one of the largest for digital-asset derivatives – exceeds US$14 billion, while the equivalent figure for ether is about US$3.8 billion.
Sean McNulty, director of trading at liquidity provider Arbelos Markets, flagged the risk of a “choppy market” amid the expiry of the derivatives positions.
Russian businesses are reportedly using bitcoin and other cryptocurrencies to make international payments.
It’s a trend that comes in the wake of legislative changes that permitted these types of payments to get around western sanctions, Reuters reported Tuesday (Dec. 26), citing comments from Russian Finance Minister Anton Siluanov.
As the report noted, the sanctions — issued following Russia’s invasion of Ukraine in 2022 — have made it tougher for Russia to trade with partners like China and Turkey. But this year, Russia began allowing crypto for foreign trades, and is working on legalizing the mining of crypto such as bitcoin.
“As part of the experimental regime, it is possible to use bitcoins, which we had mined here in Russia (in foreign trade transactions),” Siluanov told Russia 24 television channel.
“Such transactions are already occurring. We believe they should be expanded and developed further. I am confident this will happen next year,” he said, adding that using digital currencies to make international payments represent the future.
PYMNTS explored this idea earlier this week in a report on events in the cryptocurrency/blockchain world in the past year.
“Cross-border payments, historically plagued by high fees and slow transaction times, underwent a significant transformation in 2024,” that report said. “Blockchain technology emerged as a key enabler, offering transparency, speed and cost efficiency.”
Stablecoins play a key role, PYMNTS added, letting businesses bypass traditional correspondent banking networks and settle transactions almost instantly.
“Blockchain technology and public blockchains in particular, are opening up a number of new use cases, one of which is to transfer value — such as remittances — from one country to another,” Raj Dhamodharan, executive vice president, blockchain and digital assets at Mastercard, told PYMNTS.
Research by PYMNTS Intelligence has found that cryptocurrency use in making cross-border payments could be the winning use case that the sector has been searching for. The research shows that blockchain-based cross-border solutions, especially stablecoins, are being increasingly used by firms looking for better ways to transact and expand internationally.
“Blockchain solutions and stablecoins — I don’t like to use the term crypto because this is more about FinTech — they’ve found product-market fit in cross-border payments,” Sheraz Shere, general manager of payments and commerce at Solana Foundation, said in an interview here earlier this year. “You get the disintermediation, you get the speed, you get the transparency, you get extremely low cost.”
Crypto
Markets Show Resilience Ahead of End-of-Year Options Expirations: Bybit x Block Scholes Crypto Derivatives Report
DUBAI, UAE, Dec. 26, 2024 /PRNewswire/ — Bybit, the world’s second-largest cryptocurrency exchange by trading volume, released the latest Crypto Derivatives Analytics Report in collaboration with Block Scholes, highlighting the muted market volatility despite major options expirations on Friday. BTC and ETH’s realized volatility has increased, but short-term options haven’t adjusted to this change. This indicates that while spot prices are fluctuating, the options market is not fully reacting to these shifts, although BTC and ETH volumes have displayed slightly different patterns.
Sources: Bybit, Block Scholes
With more than $525 million in BTC and ETH options contracts expiring on Dec 27, 2024’s end-of-year options expiration looks set to be one of the biggest yet, yet expectations for volatility have remained subdued. The report highlights an unusual inversion in ETH’s volatility structure, but BTC has not mirrored the reaction. Additionally, a change in funding rates—sometimes turning negative as spot prices drop—signals a new market phase. Notably, BTC’s volatility structure has been less responsive to changes in spot prices, whereas ETH’s short-term options are exhibiting more noticeable fluctuations.
Key Findings:
BTC Options Expirations:
In the past month, BTC’s realized volatility has been higher than implied volatility on three occasions, each time reaching a relatively calm equilibrium. Open interest in BTC options remains high, contributing to potential increased volatility as we near the end of the year. Around $360 million worth of BTC options (both puts and calls) are set to expire soon, which can affect price movement.
ETH Options: Calls Dominate
Despite a mid-week inversion, ETH’s volatility term structure has flattened, maintaining levels similar to those seen over the past month. In the final week of 2024, calls overwhelmed puts in open interest in ETH options, although market movements and trading activities are more on the put side.
Access the Full Report:
Gain deeper insights and explore the potential impacts on your crypto trading strategies by downloading the full report here: Bybit X Block Scholes Crypto Derivatives Analytics Report (Dec 24, 2024)
#Bybit / #BybitResearch
About Bybit
Bybit is the world’s second-largest cryptocurrency exchange by trading volume, serving a global community of over 60 million users. Founded in 2018, Bybit is redefining openness in the decentralized world by creating a simpler, open and equal ecosystem for everyone. With a strong focus on Web3, Bybit partners strategically with leading blockchain protocols to provide robust infrastructure and drive on-chain innovation. Renowned for its secure custody, diverse marketplaces, intuitive user experience, and advanced blockchain tools, Bybit bridges the gap between TradFi and DeFi, empowering builders, creators, and enthusiasts to unlock the full potential of Web3. Discover the future of decentralized finance at Bybit.com.
For media inquiries, please contact: [email protected]
For more information, please visit: https://www.bybit.com
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