Front Running Explained
Misinformation is at the heart of the majority of successful scams and hacks. This is why malicious actors find ways to exploit the unknowns to remotely access and steal from individuals. Other times, hackers make the most of chaos, as is apparent by the 220% increase in spam messages within the first month of the COVID-19 lockdown.
You can imagine how effective the spam messages must have been, considering the dangerous mix of misinformation and fear was at its highest at the time. This is why we, at Lossless, believe that information is essential as it helps you stay ahead of the curve. And in consequence, you are more equipped to navigate manipulative hack attempts or attacks like front running.
Front running is trading an asset class with prior knowledge. Even before cryptocurrencies came into play, it has been a problem. Intermediaries gave pricey market info to the highest bidders. Front running has found its way into the crypto market even with the absence of brokers or any form of authority, albeit in a way more complex form.
On the surface, front running does not harm anyone or the network in general, but it does. How? Miners and transaction validators place orders influenced by the access to pending transactions on the network. Let’s walk the example route to get a more vivid description. Say a front-runner got wind of the news of a big-money order locked in a smart contract on the Ethereum network, his bots drive up the gas fee necessary for the transaction to go through. The trader is then forced to pay the higher transaction fee he was ambushed with.
These increased transaction fees pile up and have resulted in colossal money losses on the traders’ path. Two hundred and eighty million dollars is lost each month to front running, with USD 12 million being the daily count, reports Cybernews. If the math is done for yearly losses, surely you will feel a knot tie in your stomach.
The Different Forms of Front Running
Front running can happen in a plethora of ways. However, there are three main ways they take shape. They are:
These attacks occur when malicious actors displace the original transaction with theirs. As a result, the intended effect the trader had in mind at the start of the transaction is not achieved. Either the effect is not as satisfying, or it is plain negative.
The attacker places an original transaction between two less costly transactions in an insertion attack—the front runner profits from the difference in the orders without needing to hold any asset.
A scenario where a large number of genuine transactions are placed on hold is called a suppression attack. During this time, some traders become disinterested in going through with the transaction.
The Front Running-Exchange Conversation
This is where the battle of the exchanges may become pivotal. Decentralized exchanges are often the playground for front runners because of the ease of accessibility of transaction data. In contrast, orders are a closely kept secret on centralized exchanges. Because front running relies heavily on information, it is almost impossible for transactions on centralized exchanges to be front-run unless the owners of the exchange decide to be front runners.
How to Get Ahead of the Front Runner
Being surprised by a front runner can be frightening, considering it is almost impossible to do without decentralized exchanges. While treading these treacherous waters, here’s how to avoid the parasites who intend to profit at your own expense.
Stay Away From Low Liquidity Pools
Low liquidity pools are the desired hunting grounds of front runners for many reasons: the competition for front running is less. There’s a reduced probability of the market being unsettled by a larger order and a lower commitment of liquidity. Avoid liquidity pools that see fewer actions; this will thin out the chances of being a victim of front runners.
Place Small Orders
Small orders disinterest front runners because of the myriad of factors, like entrance and exit gas fees. The smaller the order the fewer front runners stand to gain, and the safer you are.
Set a HigherThan Average Gas Fee
Decentralized exchanges favor transactions with high gas fees, giving front runners less time to act. In contrast, your order is placed on queue when you go with default gas fee settings. This is very vital, particularly if you have placed a large order.
Set Low Slippage
Slippage is the degree of freedom to which your order can vary. Most exchanges allow users to set their preferred slippage tolerance. Considering that setting high slippage to front runners is like throwing a dog a bone, we recommend that you set your slippage deviation to be as low as possible.
The concept of front running can be accurately described as a “wolf in sheep’s clothing.” Despite the largely innocuous appearance, front runners are responsible for the 9-figure monthly losses traders experience. You must take appropriate measures to reduce the chances of being caught up in front running attacks, especially as the DeFi space is poorly equipped to curtail the activities of malicious actors.
Users are disadvantaged because attackers are ingenious with their tactics and execution. For this reason, educating the community about their strategies and measures to take is pivotal to the overall user experience and health of the DeFi space.
From our end, we can prevent hacks by simply the Lossless protocol integration into tokens. The remarks of Vygandas Masilionis, Lossless’ CEO, buttress this claim.
“Lossless, however, aims to bring unprecedented flexibility against various vectors of attack, including, if desired, frontrunning. As long as token creators define front-running as the type of transactions that shouldn’t occur — Lossless transaction freezing functionality can block frontrunning bots by default,”
Thwarting the efforts of all forms of hacks is a cumulative effort; Lossless, token creators, and you. For this reason, you must abide by stipulated rules and best practices to reduce the frequency of successful attacks.
Lossless is the world’s first DeFi hack mitigation tool for token creators. Apart from our known cyber security solutions and renowned professionals, the community also plays a role. With a tangible reward system, community members are also encouraged to explore new ways to detect hacks and fraudulent transactions.
Our protocol halts counterfeit transactions through various methods of fraud identification and automatically reverses any stolen tokens back to the original owner. Our solutions to the impending problems of cyber theft within the blockchain space are thorough and applicable within many protocols.