Unfortunately, nowadays, it is misused both in stock market transactions and in the world of cryptocurrencies Non-fungible tokens (NFT), can be seen. One of these methods, which happened to open from stock markets to the world of blockchain and digital currencies, is Front Running. Through front running, profiteers take advantage of unwary and uninformed traders.
The goal of a front runner is to share a portion of tokens with low price buy and later sell them at a higher price and exit the position at the same time. When this process is executed accurately, risk-free profits will accrue to the front runner. In this article, we discuss the mechanism of front running and its types, and at the end, we introduce a series of measures to reduce its risks.
What does front running mean?
Front running is a common term in the stock market that means The use of internal information of a company to enter the market is before the start of competition. Of course, Front Running is not limited to the stock market and can also occur in the cryptocurrency and NFT markets.
For example, a person with access to secret information can find out which NFTs will soon become extremely popular in the market and buy them if desired, eventually driving up their prices. In this case, this buyer can make a good profit by selling the NFTs he invested in at a high price after the sale becomes public. For example, in September 2021, it was revealed that Nate Chastain, the production manager of the OpenSea platform, bought some NFTs just before they became popular in the store and made a good profit by selling them some time later. Due to the access to a series of secret information, such as the information related to the NFTs that were soon to be highlighted in OpenC, he was able to gain unfairly.
Front running in digital currencies
In general, front-running attacks often occur when transactions are carried out on decentralized exchanges. In these trades, when faced with a huge swap transaction request in the liquidity pool, the profit seeker manipulates the ratio of the liquidity pool assets of exchanges with automatic market makers and changes the price of both currency pairs and tries to win the price auction. Gas will front-run the transaction. Front running is done earlier than the main transaction, and as a result, the price of the cryptocurrency purchased after the initial transaction increases, and the difference in price becomes much higher with the main transaction. In this situation, traders gain profit only by making a transaction opposite to the previous transaction and through arbitrage strategy.
In the digital currency market, network moderators can see and even respond to transactions before they are blocked, as a summary of all transactions is visible on Mempool before they are processed. This is where front-running bots come in, scanning for pending transactions and paying huge gas fees for miners to process the bots’ transaction first and make a large transaction that affects market pricing.
Front Running robots operate in a fraction of a second and are able to read a string of transactions, calculate the optimal transaction volume and gas cost, and execute it after configuring the transaction. Such robots work by reading the information of pending transactions in the blockchain and using an interactive script, they buy before the buyer and sell after him. Instead of following every move in the market and waiting for the right time to buy and sell, these robots automatically combine and evaluate market data and execute transactions on behalf of clients. This means that by using these robots, the front runners increase the probability of their transactions being selected before the pending transactions and leave the uninformed traders behind.
Types of front running attacks
The three main types of Front Running attacks are:
Displacement
In this attack, an illegal network of mining machines replaces a legitimate block of the network with its own block. In this type of attack, the fee offered by the front runner is 10 times or even more than the fee offered by the victim.
Insertion
In this type of attack, after the front runner has done his work, the state of the contract changes and he waits for the execution of the main trader’s transaction. For example, if the main trader offers a purchase price higher than the best selling offer in the network, the front runner enters and buys the desired asset with the best selling offer and makes an offer for sale slightly higher than the first trader’s purchase offer. As a result, the first trader may buy from him.
Suppression
In such an attack, the front runner tries to delay the execution of the target transaction. In this method, several transactions with a very high Gas Price and Gas Limit and, as a result, a higher fee than the target transaction, are sent to the network through smart contracts, and finally, the processing of the initial transaction is delayed.
Is front running illegal in the world of digital currencies?
Front running in stock markets is illegal; Because the general people who trade in these markets do not have access to secret information; But in the crypto market, all information is stored in a transparent public digital ledger. Consequently, Front Running cannot be considered an illegal activity.
In other words, while front running is prohibited in stock markets due to the trader’s use of non-public data, in decentralized exchanges all traders can access the data on the blockchain; Therefore, users do not have an advantage over each other in accessing information and cannot outdo each other in an unfair competition. This makes Front Running illegal in the cryptocurrency world.
How to be safe from front running attacks?
There is still no definite and clear solution to deal with front running. But by taking measures, the probability of these attacks can be reduced. Some of these are:
Split transaction
One effective way to prevent front running attack is to split transactions into many smaller transactions so that the transactions are less attractive to front running bots. This causes bots to ignore transactions instead of front-running them.
Use of large liquidity pools
Frontrunners favor pools with low liquidity because they are less likely to compete and disrupt their transactions by executing large orders (which change the pool’s weight unexpectedly). By transacting in large liquidity pools, you will be safe from this risk to a large extent.
Reducing the amount of slippage
By setting the maximum slippage volatility option in decentralized exchanges, you can reduce the risk of frontrunner attacks. In fact, by doing this, you can set the maximum deviation from your received amount. For example, suppose you have registered an order in a decentralized exchange and you expect to earn 500 Tether from it. If you set your slippage to 1% of your order, you will not receive less than 495 Tether. But if the slippage tolerance is high, you may receive a lower amount.
Therefore, always remember to set the Maximum Slippage between 0.5 and 2%. If you want to place a large order, reduce your slippage further. Front runners like your slippage to be high, so it’s best to do the opposite.
Pay more gas fees
Front runners from seeing Slow transactions They are happy because then they will have more time for their attacks. Paying less gas will cause your transactions to remain in the queue for longer, giving the front runners more time to strategize, which will ultimately cost you.
Paying extra gas fees incentivizes miners to confirm your transaction faster and minimizes your chances of becoming the target of a front runner. Therefore, you should set the price of gas above the average.
Front running and its impact on the world of digital currencies
According to published reports, FrontRunning has managed to lose $280 million every month to unsuspecting traders worldwide. In addition to financial losses, Front Running makes current investors and even those who want to join the cryptocurrency market in the near future lose confidence.
Also, frontrunning is considered a threat to the DeFi space, or decentralized finance. New DeFi protocols are working on reducing its destructive effects on its service, but there is still no complete and comprehensive solution for it. However, with the advancement of technology and the use of new tools, we will see the growth and development of security in digital currency. what is your opinion?
What is Front Running? Review of Front Running attack on the crypto market appeared first on Wallex Blog. appeared.
