‘Code is Law’ goes to court in $25M Ethereum MEV exploit

The trial of brothers Anton Perer Bueno and James Perer Bueno began yesterday at the SDNY courthouse in New York. The brothers, both in their 20s, were indicted last May on charges of “conspiracy to commit wire fraud, wire fraud, and money laundering.”

The charges relate to a $25 million exploit of the Maximum Extractable Value (MEV) bot on Ethereum that occurred in April 2023.

Business Insider reports that the brothers are expected to argue that their actions were in line with Ethereum’s “economic incentives” and that all they did was “outsmart some ‘predatory’ automated trading bots.”

Yesterday’s jury selection was covered by Matthew Russell Lee of Inner City Press, who will continue to live-tweet the trial.

Read more: US indicts Ethereum validator for exploiting MEV traders

Fee

According to the complaint, the Perer Bueno brothers “unauthorizedly obtained access to pending personal transactions and used that access to modify certain transactions and obtain victims’ virtual currency.”

It added that they “rejected requests for the return of stolen virtual currency and took numerous steps to hide their ill-gotten gains.”

The document also notes that the brothers’ academic background “studied mathematics and computer science at one of the most prestigious universities in the country.”

Former Deputy Attorney General Lisa Monaco called their actions “Unprecedented wire fraud and money laundering scheme” at that time.

abuse

The brothers’ actions targeted MEV bots on the Ethereum network. MEV bots analyze pending transactions and look for opportunities to profit, often at the expense of other users.

One classic example is “sandwiching” other users’ transactions. MEV bots can insert their own transactions before and after the token swap to manipulate the price and make a profit if the first user suffered a loss.

read more: “Crypto Performance Art” Depletes Contracts One Block After Release

A sophisticated technical exploit in April 2023 took advantage of the first stage of such a loss-making “sandwich.” This replaced the rest of the MEV bot’s transaction bundle and earned profits in return.

In exploiting Flashbots’ MEV boost relay, fellow validators were able to submit fake signatures and sneak a peek at the block’s transactions.

This action resulted in a hefty penalty of 1 ETH ($1,800 at the time). $25 million profit.

discussion

The “code is law” argument boils down to the idea that if a transaction is successful by a distributed system that executes autonomously, then that action should be considered to be within the rules of the system.

Citing court documents, Business Insider reported that defense attorneys argue that Ethereum has “no central authority” and that “economic incentives guide the actions of the parties.”

If these incentives fail to prevent events like the one in April 2023, it is a system problem, not fraud. It also highlights the lack of a “promise with the victim”, which is classified as fraud.

The brothers’ lawyers appear intent on separating technical details from the debate over what should and should not be allowed on Ethereum.

In a letter filed yesterday, they ask Judge Clark to limit Flashbots’ Bart Miller to technical expertise only. They are expected to object to any mention of broader Ethereum “rules” or expectations for “‘honest’ validators.”

problem

But the suit says the brothers were well aware that their plans were in trouble.

In spinning up the Ethereum validators needed to perform the exploit, they allegedly formed two companies beforehand and tried to hide the profits after the fact.

Rather than being sent directly to the company’s exchange account, the funds were first transferred to multiple wallets. During this process, $3 million was ordered frozen by foreign law enforcement agencies.

The indictment also mentions online searches such as “how to launder cryptocurrencies,” “CEFI exchanges without KYC,” “wire fraud restrictive clauses (sic),” and questions regarding extradition agreements.

meaning

The theory that “the code is the law” has been brought up many times before. The hackers who stole $16 million from Indexed Finance in 2021 claimed they simply outsmarted the protocol.

He then fled from Canadian police.

The following year, Abraham Eisenberg claimed to have executed a “high-profit trading strategy” that drained the lending platform Mango Market of more than $100 million.

read more: What does Abraham Eisenberg’s “code is law” defense mean for DeFi?

“What are we going to do? Arrest him?” Mr. Eisenberg was arrested in Puerto Rico and convicted last year. But at trial, his defense chose to focus on the lack of evidence presented by the prosecution.

That decision was ultimately overturned in May, but Eisenberg remains in prison on unrelated charges. Child sexual abuse content was discovered during a search of his device in the Mango Market incident.

Peraire v. Bueno may be the first major test of the “norm is law” philosophy against the existing legal system.