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.
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.
What is front-running in crypto?
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.
Related: DeFi vs. CeFi: Comparing decentralized to centralized finance
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.
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