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Mango Markets judgement raises more questions for smart contract law

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"What are you gonna do, arrest me?", Avi Eisenberg confidently wrote on Twitter days after he had successfully exploited the decentralised lending platform Mango Markets for $110 million in October 2022. To execute his exploit, Eisenberg did not use a hack but a financial engineering attack. He artificially drove up the price of the platform's native token MNGO on various exchanges. He then borrowed a large amount against his MNGO collateral on Mango Markets and defaulted on his MNGO position as soon as the price crashed.
"What are you gonna do, arrest me?", Avi Eisenberg confidently wrote on Twitter days after he had successfully exploited the decentralised lending platform Mango Markets for $110 million in October 2022. To execute his exploit, Eisenberg did not use a hack but a financial engineering attack. He artificially drove up the price of the platform's native token MNGO on various exchanges. He then borrowed a large amount against his MNGO collateral on Mango Markets and defaulted on his MNGO position as soon as the price crashed.

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“What are you gonna do, arrest me?” Avi Eisenberg confidently wrote on Twitter days after he had successfully exploited the decentralised lending platform Mango Markets for $110 million in October 2022. To execute his exploit, Eisenberg did not use a hack but a financial engineering attack. He artificially drove up the price of the platform’s native token MNGO on various exchanges. He then borrowed a large amount against his MNGO collateral on Mango Markets and defaulted on his MNGO position as soon as the price crashed.

What is interesting about this case is that Eisenberg did not do much to hide his traces. In his understanding he had simply executed a “highly profitable trading strategy.” This aligns with the paradigm often touted by libertarian crypto proponents: Code is Law. After all, Eisenberg did not alter or manipulate the code. Nor did he drain any wallets. He took advantage of poorly thought through economic assumptions. Mango Markets should never have allowed their illiquid platform token MNGO to be used as collateral.

Last week, US jurors took a different view. A Manhattan jury found Eisenberg guilty of fraud and market manipulation. He is facing up to 20 years in prison.

This feels like a prelude to many similar cases in the future. As decentralised finance attracts billions in funds, complex financial and technical assumptions open up real world legal questions. It does not help that financial regulators view most of the underlying tokens as securities. More and more tokens are issued as so-called governance tokens that give holders rights to certain cash flows and participation in protocol governance. But what if a team decides to go against the vote of their token holders? Legally speaking there is no protection, which is exactly like crypto true-believers like it to be. The idea is that a truly decentralised project should minimise the need for governance. Smart Contracts should handle as many decisions as possible. In practice, large tokenholders or even institutional funds that participate in governance might disagree. Courts find themselves increasingly involved as the case of Mango Markets shows.

What if these matters could be resolved entirely within the crypto industry? Thanks to full Blockchain transparency and the ethos of the space, so-called ‘on-chain’ sleuths oftentimes analytically hunt down bad actors. Sometimes White-hat hackers even manage to recover funds directly from hackers. But whether this will scale as the industry grows is unlikely. Eisenberg is facing the full might of US courts. Other bad actors might follow soon.