Decentralized exchanges (DEXs) nip in the bud several issues concerning their centralized counterparts such as concentration of liquidity in the hands of a few players, compromise of funds in case of a security breach, closed control structure and more.
One issue, however, that has refused to subside is front-running. Unscrupulous players are still finding ways to defraud unsuspecting traders.
If you have received less than expected when placing a trade on a DEX, there is a pretty good chance of you getting hit by front runners. These bad actors exploit the automated market maker (AMM) model to make profits at the expense of unsuspecting traders.
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This article will explain the attack vector and help you understand the basic concept of front-running in crypto trading, the potential consequences and how to prevent crypto front-running.
The term “front-running” refers to the process when someone uses technology or market advantage to get prior knowledge of upcoming transactions.
This allows the bad actors to take advantage of the forthcoming price movement and make economic gains at the cost of those who had introduced these transactions. Front-running happens via manipulations of gas prices or timestamps, also known as slow matching.
On centralized as well as decentralized exchanges, front-running is a frequent activity. The objective of a front runner is to buy a chunk of tokens at a low price and later sell them at a higher price while simultaneously exiting the position. When executed precisely, it brings in risk-free profits for the traders committing it.
Trading of stocks and assets based on insider knowledge to take advantage of the price movement has been a well-known tactic. Though illegal and unethical, brokers have been engaging in it.
The tactic closely resembles insider trading with just a minor difference that the executioner works for the client’s brokerage and not the client’s business.
Frontrunning is done using crypto front-running bots functioning on a millisecond-scale timeframe. Before a person blinks, they can read a string of transactions, calculate the optimum transaction size and gas price, configure the transactions and run them.
The core of a front-running bot functions by listening for the pending transaction on the blockchain. Interacting with the blockchain using an interactive script, the bot buys before the buyer and sells right after it. The bot analyzes the trends of the crypto and executes transactions to make a profit.
When a trade occurs, the system broadcasts it to the blockchain, requiring miners to verify the transaction. However, in any blockchain of significance, the stream of incoming transactions is more than the capacity of the subsequent block. Unmined transactions are left in a pending transaction pool called a mempool.
Blockchain mempools are transparent, a feature that the front runners exploit. Getting insight into the mood of the traders, they are able to predict the upcoming price movements and place their own orders accordingly.
They set a higher gas price on their transactions to encourage picking their transactions before the pending ones, thus front-running the unsuspecting traders.
There is no single solution to solve issues regarding front running on all platforms. Rather, various anti-front-running approaches need to be followed on different projects, depending on the scenarios.
Front runners are fond of low liquidity pools, as there is less chance of competition as well as disruption of their transaction by a large order that unexpectedly alters the pool weighting. Executing your trades in large liquidity pools makes it less likely to get hit by frontrunning.
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Does the question “How do I avoid slippage” perennially pricks you? What you can do is set a maximum slippage tolerance in most decentralized exchanges. In other words, you can fix the maximum deviation from the expected return. An example will help you understand the scenario better. - Cointelegraph.
