It is often argued that at least some transparency-oriented regulatory tools used in “traditional finance” are not needed in DeFi, because DeFi is by design much more transparent, especially on Ethereum. This is likely true to some extent, but not enough attention has been devoted so far to investigating both the promise and the limitations of this approach.
How transparent is Ethereum and what could this mean for regulation?
We look at a specific risk of Ethereum users being harmed by operators of Ethereum nodes (RPCs) to which those users directly submit their transactions. Our aim is to investigate whether it is possible (and, if so, at what cost) to use publicly available information to monitor for instances of this occurring. We intentionally chose what appeared to be a difficult data problem to illustrate the limitations of Ethereum’s transparency.
The motivation for asking this question is that if this (and similar) user harms can be monitored using public data, then regulators could do this kind of monitoring. We suggest that - whenever possible - this policy response could be more appropriate than alternatives currently used in financial regulation (e.g. registration or licensing of relevant operators, disclosure requirements).