Repost from Modern Consensus, Alice Kohn: “Sandwich Attacks: Are You on the Menu?” The full report and all related findings are available on the official website of Modern Consensus.

raditional “front running” is trading of stocks or other financial assets using privileged information about an upcoming transaction that is anticipated to significantly impact its price. For example, brokers could front run trades by using insider knowledge regarding their firm’s imminent issuance of a buy or sell recommendation to clients, a move expected to influence the asset’s price. Trading on this kind of non-public information is illegal in most jurisdictions, not only because it’s unfair to other market participants but also because it degrades the integrity of financial markets and erodes investor trust.

In the often “Wild West” of crypto markets, given that all too often lawmakers haven’t caught up with technology, regulators are preoccupied with increasing their own power or regulating by enforcement – and ultimately, the crypto community has largely failed to police itself – market participants are typically left to fend for themselves.

In the context of decentralized finance (DeFi), front running refers to the practice of a trader or bot capitalizing on advance knowledge of upcoming transactions in a blockchain network, typically on Ethereum given its outsized role, to make profitable trades.

Here’s a breakdown of how it typically works:

This practice is controversial and considered unethical by many in the crypto community. It exploits the transparent nature of blockchain transactions and can lead to market manipulation. Efforts to mitigate front running in DeFi include the development of more sophisticated transaction ordering mechanisms and privacy-enhancing technologies.

So what is a sandwich attack? This is a specific type of front running that involves placing not just one but two transactions around a large pending transaction, in order to profit from the price movement it causes. Here’s how it works:

So the attacker takes advantage of knowing a victim’s trade details in advance and manipulates the market price to their benefit, both before and after the victim’s transaction. This can lead to a worse trade outcome for the victim because of a phenomenon called “slippage” – the variance between the anticipated and executed prices of an order due to crypto’s inherent volatility when there are low trading volumes.

Ways to avoid being front run

There are several strategies and practices that can help users avoid becoming victims of front running and sandwich attacks in the DeFi space:

Slippage tolerance: setting a low slippage tolerance in decentralized exchanges (DEXes) can prevent your transaction from being executed if the price impact is too high, which is often the case in sandwich attacks.

Private transactions: some platforms offer private transaction services, where details of your transaction are not made public until they are executed. This prevents potential attackers from seeing and exploiting your transaction in advance.

Smaller transactions: large transactions are more likely to be targeted by front runners and sandwich attackers. Splitting a large transaction into smaller ones can reduce visibility and attractiveness to attackers.

Limit orders: using limit orders instead of market orders allows you to specify the maximum price you’re willing to pay or the minimum price you’re willing to accept. This can prevent buying at inflated prices due to front running.

Transaction batching: some services offer transaction batching, where multiple transactions are combined and executed together. This can obfuscate individual transaction details, making it harder for attackers to target specific trades.

Time of execution: executing transactions during less active hours can reduce the likelihood of being targeted, as there are fewer transactions in the mempool for attackers to monitor.

Flashbots: with Ethereum, using Flashbots (a system for miners and traders to directly negotiate transaction inclusion and ordering) via the wallet’s RPC settings can mitigate the risk of being front run.

DEX aggregators: using DEX aggregators such as CoW Swap can help, as they split your transaction across multiple DEXes, reducing the impact of your trade on any single liquidity pool and making it harder for attackers to profit from sandwich attacks.

Upgraded protocols: some DeFi protocols are implementing solutions to mitigate these risks, such as using different transaction processing mechanisms that are less susceptible to front running.

Constant vigilance: ultimately, staying informed about the latest security practices and being aware of the risks inherent in DeFi trading is crucial.

It’s important to remember that while these strategies can reduce the risk of being front run or sandwich attacked, they can’t eliminate it entirely. Always exercise caution and stay updated on best practices in the rapidly evolving DeFi landscape.

* A blockchain’s mempool (short for “memory pool”) functions as a temporary storage area for pending transactions, facilitating transaction validation, preventing double-spending, and enabling nodes to choose transactions for inclusion in mined blocks based on fees, which contributes to blockchain integrity and efficiency.