Should We Legalize Market Manipulation for Crypto?

Earlier this week, the US government charged well-known crypto exploiter Avi Eisenberg with commodities fraud and market manipulation for his attack on Mango Markets, a DeFi platform.

Maybe posting your crimes on Twitter is not the best idea?

While I can never condone somebody knowingly committing a crime, I’d like to propose we make Avi’s actions legal for DeFi protocols (not legacy finance), with a catch.

A proving ground for financial experiments

If you want to have robust, automated, decentralized financial protocols, you need people to test, stress, and undermine those protocols. How else will you know whether they’re safe or where their vulnerabilities lie?

Testnets, audits, and bounties only go so far. They can’t replace actual usage by thousands of users in a real-world context.

DeFi protocols have no complaint desks. You can’t sue a smart contract. The world’s governments have no regulatory framework for global, open-source computer code that runs at scale without restriction.

What if we create a global DeFi sandbox, with incentives and rewards for creating and destroying financial models before releasing them into the wild? Or, releasing them into the wild with clear disclosures and perhaps a “gate” (e.g., authentication for wallets to segregate money/contracts within the sandbox from money/contracts in the real world)?

Let’s throw in a two-year safe harbor period—or even government grants—for experimentation on DeFi protocols and algorithmic stablecoins.

What about a robust privacy framework to go along with it? Disclaimers on front-ends, websites, and messages delivered to connected wallets before executing transactions?

As long as participants know what they’re getting into and the inevitable failures do not harm the wider financial system, maybe we should give predators, speculators, and engineers a way to fool around with the technology IRL without fear of arrest or triggering a wider financial crisis.

As iron sharpens iron, so one person sharpens another

Let the winners make a lot of money. Let the losers lose a lot of money. Progress ensues.

Whatever you can make from exploiting the protocols, you keep forever. After a certain amount of time, the experiment ends, results are shared, and the protocol goes public. Market manipulation becomes illegal again.

I touched on this idea briefly in the September 2022 monthly issue of my newsletter,Crypto is Easy.

Byron Gilliam riffed on this idea in the October 25, 2022 issue of the Blockworks Dailynewsletter.

Call it a proving ground for DeFi. A playground for speculators. A safe space for developers, engineers, and those who want to profit from their failures.

If you, like me, believe DeFi protocols will power white-label financial services for big banks and back-end development platforms for the next wave of financial services, we need people to push these protocols to their breaking point.

Kill the weak protocols so only the strong ones thrive. Show what works, what doesn’t, and how to build a better financial system.

Anything that survives will have our trust and confidence.

Trust costs a lot of time and money

Our legacy financial system offers trust and confidence, but at a huge cost.

We need massive bureaucracy, laws, rules, and regulations to make it function.

Financial entities need extensive oversight and costly compliance processes to make it run.

Finance workers need expensive certifications, years of education, and deep social and professional networks to make it work (often, just to find work).

Trust is an expensive, complicated thing that takes years to develop.

Even then, we get failures all the time. Sometimes, those failures are so large, they threaten the very system that trust is based on.

Is it so bad to want some part of that system to work with the same precision and certainty as a calculator? At pennies on the dollar for what we pay today?

Rules, then innovation

“Composability” is a big deal in DeFi. It’s the whole point—create global, permissionless financial protocols that engineers can stack and configure to generate yield, harness public capital, and make markets more efficient.

We can’t get to that point without a lot of experimentation and failure. Not just creative destruction, but also constructive destruction.

For the first time, we can test financial concepts in the real world, but most of those tests involve tampering and fraud.

Let’s create a legal framework that gives manipulators and fraudsters a place to ply their craft for the benefit of all of us.

At stake is a world where even the poorest of the poor can access humanity’s collective wealth and anybody with some financial savvy and a laptop can compete with the biggest financial entities on earth.

For the sake of a stronger, fairer, more efficient financial system, can’t we allow bad people to do bad things in a safe environment where they get rewarded for their efforts without risking the welfare of those who choose not to participate?

This post is also available as an NFT on Mirror.

Mark Helfman publishes the Crypto is Easy newsletter. He is also the author of three books and a top bitcoin writer on Medium and Hacker Noon. Learn more about him in his bio and connect with him on Superpeer.