(2023) 26 University of Pennsylvania Journal of Business Law (forthcoming)
co-authored with Alex Sarch and Natasha Vasan
Markets built on public, permissionless blockchains like Ethereum are radically transparent. This creates opportunities and strategies that are rarely, if ever, seen in traditional markets. Among the most interesting but understudied of these is the use of sophisticated algorithms (“bots”) to automatically copy and front-run or otherwise exploit other users’ trades, as these are typically publicly viewable while they wait to be executed. In crypto markets like Ethereum, Generalized Profit-Seeker (GPS) bots can access publicly available pending orders (blockchain transactions), simulate them to determine if they will be profitable, and copy (or otherwise piggy-back on) those transactions deemed profitable according to the parameters of the bot. Sometimes, this benefits the sender of the copied order—the copier effectively facilitates, even subsidizes, its execution. Other times, the sender of the copied order is blocked from a profit opportunity because the copier manages to get there first, thus making it entirely unavailable or at least less profitable for anyone who comes second. To further complicate matters, such automated “strategy copying” may involve replicating or facilitating criminal or otherwise illicit transactions, such as attempted hacks of blockchain applications or platforms.
This Article explores the legal implications of this type of radical transparency found in crypto markets and offers the first sustained legal analysis in the academic literature of the use of Generalized Profit-Seeking bots in crypto markets. This Article is part of a series on the legality of so-called Maximal Extractable Value (“MEV”) extraction techniques, which exploit the ability to order transactions in profitable ways including through the use of GPS bots which are the focus of this Article.
In particular, we argue that, given the public and competitive nature of transaction ordering in crypto markets, the operation of GPS bots to copy profitable transactions submitted publicly is generally unlikely to be a legal violation in run-of-the-mill-cases. However, we highlight several exceptions to this default permissibility, for example where the GPS bot is operated by a validator, or when the bot copies criminal or illicit transactions. The Article provides a technical introduction of transaction ordering and execution on Ethereum to serve as a necessary resource for pressing legal and policy discussions. It then examines relevant U.S. laws governing market manipulation, insider trading, and front-running in securities and commodities markets, and analyzes what these entail for the use of GPS bots in crypto markets. Ultimately, the Article aims to offer guidance to regulators and policymakers, as well as courts and practitioners, on the legality of GPS bots and MEV extraction more generally under U.S. law, as well offering suggestions and questions for further research about how the use of crypto bots should be regulated going forward.