Introduction

Front-running has been a long-standing issue in financial markets. It originated from traditional finance, where brokers or insiders used privileged information to place trades ahead of clients. It has been established as unethical and illegal, and regulatory officials apprehend and prosecute culprits.

In the crypto space, front-running happens on-chain due to the transparent nature of public blockchain transactions. Traders, bots, and even validators or miners can exploit pending transactions in the mempool for profit.

Unlike in traditional markets, crypto front-running exists in a legal gray area. Although generally considered unethical, only those with the technical expertise to manipulate transaction ordering can fully capitalize on this opportunity.

What is Front-Running in Crypto?

Front-running in crypto is exploiting publicly visible pending transactions to gain a financial advantage by executing a trade before the original transaction is processed.

Generally, transactions on the blockchain do not execute instantly. Instead, they enter a waiting area called the mempool (memory pool), where they remain until miners or validators process them. This is the window of opportunity for malicious actors to monitor trades and determine the most significant transaction that would be most profitable. They often use bots and pay higher gas fees to gain priority in processing these transactions.

Front-running is mostly targeted at decentralized exchanges, large trades, and low-liquidity tokens with exaggerated price movements. While it’s possible on high-cap tokens, the high competition, deep liquidity, and expensive gas fees make it less practical unless the expected profit is substantial.

Forms of Front-Running in Crypto

Front-running in crypto takes different forms depending on the market conditions, the actors involved, and the execution strategies. Below are the main types of front-running and how they operate;

Displacement

Traders monitor the mempool for large buy or sell orders and place trades in advance to profit from the anticipated price movement. For instance, an attacker might purchase assets just before a large order is executed by offering a higher gas price, ensuring that their transaction is prioritized and processed ahead of the victim’s transaction.

Suppression

Malicious actors take advantage of the high volume of transactions by watching for large orders. When they identify one, they generate a cluster of transactions that overwhelms the network. Consequently, the victim has difficulty executing their own order, as their transaction struggles to find space in the same block due to the overwhelming number of competing high-priority transactions.

Maximum Extractable Value (MEV) Front-Running by Validators/Miners

Miners or validators reorder transactions within a block to extract Maximum Extractable Value (MEV). Instead of processing transactions in the order they arrive, they prioritize their own or others that generate the maximum extractable value (MEV), i.e, the ability to extract profit by manipulating transaction order.

Example:

• For example, if they see a large buy order, they can insert their own transactions ahead of the observed profitable transaction.
• After the original large order executes and further increases the price, they can sell their holdings for a profit.

Sandwich Attacks

In a sandwich attack, the malicious actor identifies a large pending trade and places two transactions around it: one order before and one after a victim’s transaction.

Example: If a user tries to buy a token at $1.00, the attacker buys first, pushes the price to $1.10, and then sells it back at the inflated price, profiting at the user’s expense.

How Front-Running Works: A Step-by-Step Breakdown

Source: Hacken

Detecting a Profitable Pending Transaction

• All transactions on a blockchain first go into a temporary holding area called the ‘mempool’ before being confirmed.
• Front-runners use bots to scan the mempool for transactions that can be exploited, such as large buy orders, arbitrage opportunities, or liquidation events.
• They target transactions that will significantly impact the price of an asset.

Example: A trader submits a large buy order for Token A on Uniswap. The front-runner’s bot detects this transaction in the mempool.

Submitting a Similar Transaction with a Higher Gas Fee

• Once a front-runner identifies a profitable transaction, they quickly create a similar transaction but increase the gas fee to prioritize its execution.
• Since Ethereum and other blockchains process transactions in order of gas fees paid, the front-runner’s transaction gets executed first.

Example: The front-runner submits their buy order for Token A with a higher gas fee to process their order before the original trader’s transaction.

The Front-Runner’s Transaction Executes First, Shifting the Price

• Since the front-runner buys the token first, their purchase increases the price.
• When the original transaction executes, it fills at a higher price due to the price impact caused by the front-runner’s trade.

Example: The front-runner’s buy order increases the price of Token A from $10 to $11 before the original trader’s order gets executed.

The Original Transaction Executes at a Less-Favorable Rate

• The original trader, unaware of the front-running attack, gets their trade processed at the new, higher price.
• They experience increased slippage (a worse-than-expected price execution).
• The front-runner benefits from the artificial price increase.

Example: Instead of buying Token A at $10 as intended, the trader’s order executes at $11 due to the price increase caused by the front-runner.

The Front-Runner Exits, Securing a Profit

• After the original trader’s transaction is completed, the front-runner sells the token at the inflated price.
• This results in an immediate profit for the front-runner, often at the expense of unsuspecting traders.
• In some cases, bots continuously repeat this process to extract profits from multiple transactions.

Example: The front-runner sells Token A at $11, profiting from the price difference.

Case Studies

Sandwich Attacks on Solana

A report released in 2024 by Blockworks confirmed that front-running incidents continued on the Solana blockchain. This was due to a group of validators participating in private mempools that facilitate “sandwich attacks.” In response, the Solana Foundation penalized the involved validators.

By design, the Solana blockchain does not provide a public mempool for users to monitor pending transactions, making front-running much more challenging. However, as primary participants, validators still have access to view processed transactions.

Defensive Front-Running — Curve Finance Hack

In July 2023, Curve Finance, a prominent decentralized finance (DeFi) platform, experienced a significant security breach due to vulnerabilities in specific versions of the Vyper programming language used in their smart contracts. This exploit targeted several liquidity pools, resulting in substantial financial losses.

In response, ethical actors deployed front-running strategies to counteract the malicious transactions, they deployed MEV bots to preemptively execute transactions ahead of the hacker’s attempts, effectively intercepting and securing funds at risk. Notably, the operator known as “c0ffeebabe.eth” successfully front-ran the attacker, securing 2,879 ETH (approximately $5.4 million) and subsequently returning it to Curve Finance.

The Impact of Front-Running in the Cryptocurrency Market

Limited Adoption

Front-running creates a negative reputation for the cryptocurrency market, especially for decentralized exchanges, as traders who feel their trades are at risk of being front-run avoid using these platforms.

Manipulation

Frontrunners manipulate market activity to generate artificial hype around a token, misleading inexperienced traders into interpreting increased volume as a positive indicator. This tactic hides the asset’s true value.

Network Congestion

Multiple Front-running bots on a blockchain can congest the network, leading to bidding wars to process transactions. Regular users bear the brunt of these events as they also have to pay higher gas fees.

How to Prevent Front-Running in Crypto

Private Transaction Relayers

A Private transaction relayer in the blockchain allows users to send transactions on a blockchain network without exposing the details of those transactions publicly on the main network. This is typically done by using a separate, private mempool to relay the transaction information to the blockchain, thus maintaining privacy for the sender and receiver. Services like Flashbots, Eden Network, and MEV-Blocker help users bypass the public mempool, preventing bots from detecting trades.

Slippage Protection

Setting a low slippage tolerance ensures the transaction will not be executed if the price changes beyond a certain limit. Implementing a slippage restriction is important, and the slippage percentage should be set between 0.1% and 5%, depending on the network fee and the size of the swap.

Randomized Transaction Ordering

Randomized Transaction Ordering in a blockchain refers to a system where the order of transactions within a block is randomly determined. This prevents malicious actors from strategically placing their transactions to gain an unfair advantage. Protocols like Chainlink’s Fair Sequencing Services (FSS) prevent transaction reordering based on gas fees.

Batch Auctions

Some DeFi protocols offer Batch Aunction, a feature in which multiple individual orders are grouped into a “batch” and executed simultaneously to prevent manipulation and front-running.

Layer 2 Solutions (L2) and Rollups

Layer 2 solutions like ZK-Rollups hide transaction details in the mempool, lowering front-running risks.

Avoiding Peak Transaction Times

Performing transactions during off-peak times can reduce the chances of being targeted, as front-runners are more active during high-activity periods.

Rate Limiting

Implementing restrictions on the frequency of transactions from a single address can deter front-runners who often operate by flooding the network with rapid, successive transactions.

Smart Contract Audit

Regular audits by reputable firms can identify vulnerabilities in smart contracts that might be prone to front-running or other malicious activities.

Conclusion

Front-running harms the reputation of the cryptocurrency market and undermines its goal of offering a fairer alternative to traditional financial markets. Although tracking front-runners is challenging, various solutions are available to reduce the act. These include anti-MEV (Maximum Extractable Value) tools, Layer 2 solutions, private transaction relayers, and new decentralized exchange architectures.

Blockchain communities can also implement mechanisms to penalize miners and validators who manipulate transaction ordering for personal gain. Instead, the ethical use of front-running, as seen in the Curvance hack, should be encouraged. As the industry evolves, a collective effort toward fairer trading practices will help build trust and integrity in decentralized finance, creating the necessary conditions for widespread adoption.