Unveiling Tether’s Blacklisting of MEV Bot-Drained Validator Address Worth $25M

The Move by Tether to Blacklist MEV Bot-Exploited Address Raises Concerns

Tether, the issuer behind the popular stablecoin Tether (USDT), has blacklisted an address that drained Maximal Extractable Value (MEV) bots for $25 million last week. The move has sparked controversy among the community, with some viewing it as setting a negative precedent.

Exploiting a Bug in MEV-Boost Relay

The address in question took advantage of a bug in the MEV-boost relay to outsmart the MEV bots attempting to execute a sandwich trade. Sandwiching is a strategy where one order is placed just before a trade, and another immediately after it. This allows the trader to front-run and back-run at the same time, effectively sandwiching the original pending transaction in between.

In this case, the rogue validator address back-ran the MEV’s transaction, resulting in losses of nearly $25 million in various digital assets. This incident marks the largest MEV exploit to date, and the address has been flagged by Etherscan for its involvement in the exploit.

Controversy Surrounding Blacklisting

The blacklisting of the rogue validator address has faced pushback from the community, with some criticizing it as a form of censorship. Arthur, an engineer at the Kraken crypto exchange, described the blacklisting as “bullshit,” arguing that MEV bots also take advantage of traders and the sandwich trade they were trying to execute was equally nefarious as the draining of their funds.

Another on-chain sleuth known as ZachXBT on Twitter speculated that the blacklisting could be a result of a court order. Cointelegraph reached out to Tether for confirmation but did not receive a response by the time of publication.

Concerns about Tether’s Actions

Jaynti Kanani, the co-founder of Polygon, criticized Tether’s action as setting a bad precedent, while Jordan Hagan, co-founder of Fastlane Labs, called it the “most concerning DeFi development of 2023.” Hagan added that the main issue is Tether’s willingness to block or unblock “large amounts based on activity in the consensus layer (Beacon Chain).”

MEV Bots and Their Practices

MEV bots generate profits by taking advantage of information about upcoming transactions. They often use arbitrage to exploit price differences between exchanges. When an MEV bot detects that someone else is planning to purchase a coin, it positions itself to benefit from the expected slight price increase that its bid will bring about. By front-running the trade, the bot bypasses the queue and buys the currency for a slightly lower price.

The practices of MEV bots are often viewed as a form of invisible tax. In response to this, 27 Ethereum-based projects have collaborated to launch MEV Blocker, a solution aimed at minimizing the amount of value extracted from traders.