Milky Eggs

On the supposed “nihilism” of the Mango Markets arbitrageur

For those unfamiliar with the context, Mango Markets recently lost ~$110m as a result of a series of trades performed by Avraham Eisenberg. A portion of the money was subsequently returned, so that depositors will be made whole, and the exchange itself will take on the remaining shortfall. These “open market operations” have been variously characterized as “market manipulation,” etc.

I would like to respond to various claims made by people such as Matt Levine or Evgeny Gaevoy that these “open market operations” represent a sort of “nihilistic” or perhaps “classless” behavior. In general, these comments seem misguided. I explain why below.

Purpose and vision. One argument is that these actions reflect a profiteering vision of web3 or crypto, in contrary to a vision of building “a new financial system.” In general, I do not see the contradiction. In my view, one of the advantages of cryptocurrencies as the foundation of a separate financial system is that systems are, by necessity, subject to adversarial hardening. In this interpretation, Avraham’s actions act to strengthen the system in the long run. Of course, some people have a vision of web3 where everyone gets along and voluntarily plays nice, but frankly, this is just a stupid, moronic vision which seems fundamentally incompatible with the idea of decentralized, permissionless networks. It is hard to fault someone for taking actions that are incompatible with idiotic worldviews.

Illegality of market manipulation. Perhaps it is true that Avraham committed illegal market manipulation (or some other violation of the law). However, does it really make sense to call for prosecution and imprisonment? Let us remember that Mango Markets is an unlicensed derivatives exchange run by a team of US citizens who also held an ICO for their protocol token, which likely qualifies as an illegal security ー do we really want to be tallying up legal infractions in this situation? Shall we also arrest every MEV searcher who has ever sandwiched a trade for market manipulation? Almost everything in decentralized finance is illegal on multiple levels and we are all operating on very shaky ground here. Furthermore, if there is any core ethos of crypto, it is one of independence from the authority of the state. It seems quite hypocritical to then cry and run to the teat of the government the moment one personally suffers a loss, especially for those who have profited tremendously from the “grey-market,” barely-regulated nature of cryptocurrencies up to this point.

Exploitation of retail traders. Matt alleges that this behavior reflects a retail-exploitative vision of crypto. However, isn’t this conflating Avraham’s actions with the words of others? I do not recall that Avraham ever enticed people to deposit money into Mango Markets ー instead, he simply spotted what amounted to a dollar bill that someone dropped on the ground, and deigned to stoop down to pick it up. Let us turn the question around a little bit and notice that despite being warned about potential protocol exploits of this nature for months, Mango Markets did not implement even the simplest of risk measures, such as limiting the maximum possible loan size. Instead, they continued to operate normally, take deposits, promote themselves to retail traders, etc. One might very well argue that Mango Markets is the party at moral fault here for putting user funds at risk in an extremely preventable fashion. Additionally, as Avraham points out, professional market makers in crypto essentially print money by bleeding retail LPs (liquidity providers) dry. One could very well interpret the existence of passive LPs as a fundamental flaw in DeFi protocols that opens up users to gross exploitation ー it is just a form of exploitation that we have grown accustomed to. Is that really a strong position from which one can criticize the Mango Markets incident?

It has been said that the importance of free speech protections is not for the speech that you like, but instead for the speech that you find repulsive and disgusting. One might also make a similar statement here. Crypto participants sometimes promote a norm that their decentralized, permissionless system acts separate from or outside the boundaries of the state, and that their system benefits from its fully transparent, adversarially hardened nature. The value of this norm does not lie in the situations where protocols are operating normally, but instead in the edge cases where complex factors intertwine together to create extremely profitable opportunities for swift actors. Let us not conveniently forget the values that we purported to uphold yesterday merely because we are the victims of our own poor diligence today.