What does Avraham Eisenberg’s ‘code is law’ defense mean for DeFi?

As the trial of Avraham Eisenberg gets underway in the US, the legal credibility of decentralized finance (DeFi) as an autonomous financial system is at stake.

Eisenberg is accused of fraud after extracting around $112 million from the Mango Markets protocol in 2022.

The implications of the case are very different from the trial of Sam Bankman-Fried, which didn’t set any new precedents; fraud and money laundering are always illegal.

Yesterday, during opening statements, Eisenberg’s lawyer argued that Mango Markets worked as designed and that Eisenberg simply “executed a winning trading strategy.”

This argument is often made in the wake of DeFi exploits and boils down to the controversial idea that ‘code is law.’

The defense points to the automatic liquidation system as evidence that users do not need to commit to paying back loans that are taken out on the platform. This argument implies that losses were instead caused by the platforms’ poor risk management, allowing the use of its own (relatively illiquid) governance token as collateral, rather than criminal exploitation of the protocol.

Is code law?

Crypto lawyer and commentator Gabriel Shapiro underlined the importance of the case, suggesting the community is overlooking the potential implications for DeFi as an autonomous financial ecosystem.

Read more: Market manipulator liquidated trying to short Curve

Seemingly finding common ground with Eisenberg’s lawyer’s claims, Shapiro states “there was no bug actually … code worked exactly as intended.”

However, rather than claiming Eisenberg is innocent of market manipulation, Shapiro takes issue specifically with the idea that Eisenberg’s actions “breached a loan agreement implied by the smart contracts.”

That “simply misunderstands DeFi” he goes on, and would “create a precedent where users need to pay back bad debt to credit protocols.” They may be at fault themselves, for example by using poor risk management.

Eisenberg’s shady past

Eisenberg characterized his actions as ‘a highly profitable trading strategy’ at the time. 

Using $10 million of his own funds to pump the price of MNGO tokens on the platform, Eisenberg then borrowed all the assets on the platform against the artificially inflated position.

He later negotiated with the Mango Markets DAO to return a portion of the funds, on the condition that they would not press charges.

Despite claiming his innocence, Eisenberg fled the continental US the day after the attack. He was later arrested in Puerto Rico.

As well as the Mango Markets incident, Eisenberg was accused of foul play related to other DeFi projects, and attempted to profit by targeting Curve Finance founder Michael Egorov’s CRV positions on Aave, before getting liquidated as holders rallied round the token.

Read more: FBI found child porn on Avraham Eisenberg’s phone, court docs say

Following his arrest, Eisenberg’s already unsavory reputation took a further nosedive when FBI investigators stumbled upon alleged child pornography while searching his cellphone.

Full, live coverage of the case can be found via Matthew Rusell Lee, aka Inner City Press.

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