Ethereum
Brothers Accused of $25M Ethereum (ETH) Mining as US Reveals Fraud Charges
Two brothers have been arrested by the US Department of Justice for attacking the Ethereum blockchain and stealing $25 million worth of cryptocurrency in a 12-second exploit, according to a report. the indictment unveiled Wednesday.
The indictment charges Anton Peraire-Bueno, 24, of Boston, and James Pepaire-Bueno, 28, of New York, with conspiracy to commit wire fraud, wire fraud, and conspiracy to commit commit money laundering.
The charges are significant because they represent the first criminal action of its kind by the U.S. government related to the controversial practice of MEV, or maximum extractable value, through which operators of Ethereum (and similar blockchains) preview upcoming user transactions to earn additional profit for themselves. The government suggests in the indictment that the very existence of MEV illustrates how Ethereum itself is a vulnerable system.
“[T]“Defendants’ project calls into question the very integrity of blockchain,” Damian Williams, U.S. Attorney for the Southern District of New York, said in a press release.
According to Wednesday’s indictment, the Pepaire-Bueno brothers exploited MEV-boost, MEV software used by most validators that manage the Ethereum blockchain.
The indictment explains how Ethereum works, highlighting its staking consensus mechanism and the role of validators as participants who secure the network.
When users submit transactions to Ethereum, these transactions are not immediately recorded on the blockchain ledger. Instead, they are added to a “memory pool” – a holding area for other transactions yet to be processed.
MEV-boost allows “block builders” to assemble these mempool transactions into official blocks. MEV bots called “searchers” scour the memory pool for profitable trading opportunities and sometimes “bribe” builders to insert or rearrange transactions in a way that earns them additional profit. (These “MEV strategies” can sometimes eat into end-user profits.)
Validators, the operators who ultimately add blocks to the Ethereum blockchain, take pre-built blocks from MEV-boost and then write them to the chain, where they are permanently cemented.
The Pepaire-Bueno brothers exploited a bug in MEV-boost’s code that allowed them to preview the contents of blocks before they were officially delivered to validators, according to the indictment.
The brothers created 16 Ethereum validators and targeted three specific traders who operated MEV bots, the indictment states. They used bait trades to understand how these bots were trading, lured the bots to one of their validators who was validating a new block, and essentially tricked these bots into offering certain trades. The brothers allegedly directed the bots on certain transactions and also used their validator to “forge” the new block by sending a fake digital signature that gave them access to the full contents of the block and replaced “decoy transactions” with “forged transactions.” . In these falsified transactions, the brothers allegedly sold illiquid cryptocurrencies for which they tricked the victims’ trading bots into placing buy orders.
“In effect, the Victim Traders sold approximately $25 million of various stablecoins or other more liquid cryptocurrencies to purchase particularly illiquid cryptocurrencies,” the document states. “In effect, the falsified transactions drained the particular liquidity pools of all cryptocurrencies that the victim traders had deposited based on their initial transactions.”
This meant that traders could not sell their new illiquid cryptocurrencies, which were “rendered effectively worthless”, while the defendants absconded with the $25 million in stablecoins and other “more liquid cryptocurrencies”, a alleged the DOJ.
The defendants then allegedly laundered the funds through various addresses and series of transactions, including converting the stolen funds into DAI and then USDC.
“These brothers allegedly committed an early manipulation of the Ethereum blockchain by fraudulently accessing ongoing transactions, altering the movement of electronic currency, and ultimately stealing $25 million in cryptocurrency from their victims,” Special Agent in Charge Thomas Fattorusso of the IRS Criminal Investigation (IRS-CI) New York field office said in the release.
The indictment reviews some of the materials found by investigators, including “a document outlining their plans,” the launch of shell companies, test transactions to identify best practices for attracting MEV bots, and search histories on the Internet.
UPDATE (May 15, 5:19 p.m. UTC): Adds detail throughout.