Last update on: 9:05 am March 6, 2022 by fashionabc

Front-running in crypto trading

Front-running in crypto trading : Cheating practices are pretty common in the financial world. Brokers are trying to get more profit without blinking an eye. It makes no exception in the cryptocurrency world. When the stakes are high, ethics are often forgotten.

Front-running in crypto trading

What is front-running

Front running is the practice of capitalizing on advance information to buy or sell securities. Front running is illegal in stock markets and can occur in many other markets, especially because of the internet’s ability to disseminate information. It happens when investors trade based on information they have access to before it is publicly available, which has traditionally been considered insider trading.

Front-running in cryptocurrency trading

Front running occurs when miners are able to access information about pending transactions to take advantage of trades by buying/selling in front of the original owners. The Ethereum blockchain has a problem with front-running, where bots are able to quote a higher gas price.

Ethereum miners and bots have been front-running for a long time now. And it has become a fraudulent practice of entering into an equity trade, option, futures contract, derivative, or security-based swap to gain benefits on non-public knowledge of a substantial pending transaction.

Other parties capable of front-running are full node operators, who are tasked with watching network activities to ensure there are no irregularities. Cryptocurrency exchanges can execute front-running, but it would be against their best interest to do so. Hurting their reputation can be detrimental.

Other types of front-running attacks

Impostors have come with many malicious ideas in order to exploit the crypto market. After all, the final goal is to make as much as possible and not get caught.

Displacement attack

An illicit network of mining machines takes over a block by displacing a genuine transaction from the block with their own. Although the original transaction may still run, it will have a negative effect as intended because it is being disrupted by an alternative.

Insertion attack

In an insertion type attack, a legitimate transaction is sandwiched in between two less costly transactions, with the goal of making a profit from the difference. The attacker never intends to hold the asset for any period of time.

Suppression attack

A suppression attack is a type of denial-of-service attack that aims to prevent legitimate users from buying cryptocurrency on the exchange. When a large block of transactions is “suppressed,” crypto traders who desire to trade are unable to do so and therefore have a lower chance of getting their orders through.

Countering front-running

Just because frauds exist doesn’t mean that people should be afraid to buy Ethereum. Programmers make the blockchain network, and it comes as no surprise that they will do the best they can to tackle this malicious practice. 

Transaction counter

One way to prevent a smart contract from being hijacked is by requiring a transaction counter. This requires the sender to increment the counter before executing a state-modifying transaction, preventing another party from running prematurely.

Gas price limit

Gas price limiting is a method of preventing developers from front-running on the blockchain. It requires very little overhead, as miners will only accept transactions with a gas price below a certain threshold. This prevents them from seeking preferential treatment from developers by using a higher gas cost. It still allows them to jump ahead in line but limits how much they can push to do so. One negative side is that constant supervision is needed to set the proper limits.

Off-Chain ordering solutions

Off-chain ordering is the method of performing an initial stage of an online purchase outside of the blockchain. This allows the service provider to choose the most efficient platform for their needs, which could mean choosing a system that can offer valuable customer service features like messaging. This has one major disadvantage, though. The transaction becomes less transparent.

Avoid low liquidity pools

Liquidity is a major concern for front-runners. If a large share of a pool is committed before they enter, that will decrease the likelihood of them getting a good price when they place their order. In order to minimize the chances of being targeted by a front-runner, it is best to avoid low liquidity pools.

Make a smaller order

In order to turn a profit, traders need to risk a lot. It’s not enough that they exchange frequently; they also need to respect minimum thresholds in order to enter and exit the market at a profit. The cost of gas (and their losses) will quickly add up if they do not respect these standards. Small orders are no subject of interest for front-runners.

Summary

Front-runners will still exist in Ethereum 2.0. It’s inevitable. But it doesn’t mean it’s the end of the world. By applying some safety techniques, blockchain creators and users can protect themselves from being exploited.