What is Front Running in Crypto?

Front-running means using knowledge of pending transactions to gain an unfair trading advantage. In traditional finance, brokers use information not available to the general public about large orders to place their own trades first. In cryptocurrency markets, front-running is enabled by blockchain transparency, where bots monitor and manipulate transactions based on mempool data.

This practice can be a significant issue in crypto markets since transactions are always visible before confirmation, which allows some traders to profit unfairly. Front-runners pay higher gas fees and prioritize their trades ahead of large transactions, increasing prices before selling their assets for revenue. This problem is even more harmful in low-liquidity markets, where price movements are more significant.

Blockchain transparency plays a role in this dynamic by showing all pending transactions to anyone who accesses it. This gives traders and bots access to information they can use to predict price changes and manipulate transaction orders through gas fee bidding. Also, Maximal Extractable Value (MEV) strategies make it possible for validators to reorder transactions, getting some revenue from it, harming fair market conditions and reducing trust in the trading process.

How Front-Running Works in Crypto

The mempool is a temporary storage area where unconfirmed transactions wait before being included in a block on the blockchain. Each node keeps its own mempool, storing pending transactions in RAM until they are validated and prioritized based on fees. Since mem pools are decentralized, their contents may be slightly different between nodes because of network latency and varying transaction fees.

Traders can see pending transactions before confirmation because the mempool can be accessed by anyone. Traders and bots can monitor the mempool in real time, allowing them to analyze unconfirmed transactions. Using this information, users can estimate transaction wait times, adjust fees, and open up opportunities for front-running.

Types of Front Running in Crypto

In this section, we will explore the main types of front-running and how they work in the crypto space.

Arbitrage Front Running

Arbitrage Front Running is a trading strategy that looks for price differences for the same token across multiple cryptocurrency exchanges. Traders or bots find these differences and make trades before others can secure higher profits. This strategy is improved by front-running tactics, where traders anticipate large pending transactions that can increase the price gaps.

To increase gains, arbitrage bots monitor order books or the mempool for high-value transactions that can impact prices. They can lock in favorable prices by executing buy and sell orders before these transactions are processed. However, arbitrage front-running requires quick execution, advanced trading algorithms, and real-time market data.

Sandwich Attacks

Sandwich attacks are a form of market manipulation that mainly targets users of decentralized exchanges (DEXs). This attack involves three steps: front-running, where the attacker places a buy order just before a victim’s trade; execution of the victim’s trade, which gets processed at a higher price; and back-running, where the attacker immediately sells the asset at the higher price, getting a profit at the victim’s expense.

These sandwich attacks use blockchain transactions’ transparency, resulting in increased trading costs, price volatility, and reduced trust in DEXs. They are also a form of MEV, which allows attackers to profit beyond regular trading fees.

Generalized Front-Running

Generalized Front-Running is characterized by the use of automated bots that continuously scan the mempool for profit opportunities. These bots have a quick and efficient way to operate, using advanced algorithms that analyze market data to predict potential price movements. Traders using this strategy pay higher gas gees to guarantee that their transactions are prioritized, outrunning manual traders and profiting from price changes before other trades are executed.

This strategy results in market volatility by manipulating transaction orders and can create an unfair trading environment for regular investors. Many of these bots use MEV strategies, making it possible for them to reorder, insert, or delay transactions for higher profits. Since these bots work 24/7, they constantly monitor and explore price discrepancies, making it challenging for manual traders to compete in DEXs and other blockchain-based markets.

Key Front-Running Strategies

Transaction Insertion

Transaction insertion is a front-running strategy where a trader places a buy or sell order before a large pending trade to get profits from the resulting price movement. For example, if a bot finds a large buy order in the mempool, it can execute its own order first faster. Once the large trade increases the price, the bot then sells at a higher price.

Gas Fee Manipulation

Gas fee manipulations involve paying higher gas fees to guarantee a front-runner’s transaction will be prioritized. Since miners or validators organize transactions based on gas fees, front-runners use higher fees to get ahead of large orders. This also results in profiting from price shifts, while regular traders may face delays in execution and disadvantages in pricing.

Time Bandit Attacks

In time bandit attacks, miners and validators can reorder or restructure blocks to increase arbitrage revenue. By including, excluding, or rearranging specific transactions, they use the block’s price differences to their advantage. This manipulation, usually linked to MEV, gives miners an unfair advantage by profiting from trades before regular users can react.

Miner Extractable Value (MEV) and Front-Running

Maximal Extractable Value (MEV) is the additional amount miners or validators can get from a blockchain beyond regular transaction fees by reordering, including, or excluding transactions from a block. Usually, MEV is called an “invisible tax” since it allows miners to profit from transaction order manipulation, especially on DEXs. Miners find MEV opportunities in arbitrage, liquidations, and front-running due to the possibility of positioning transactions strategically to increase profits.

Since miners and validators control transaction ordering, they are crucial when executing MEV. They can find profitable transactions within the blocks and put their own trades ahead of other users (front-running) or reorder transactions to increase arbitrage revenue. MEV searchers, which are experienced traders or bots, explore the mempool to find MEV opportunities and bid for transaction priority. This usually results in higher gas fees and network congestion as explorers compete through Priority Gas Auctions (PGAs) to execute the most profitable MEV trades.

Some of the main MEV strategies are:

• Priority Gas Auctions (PGAs): Bots compete for MEV opportunities by increasing gas fees, guaranteeing their transactions are prioritized.
• Long Tail MEV (LTM): Involves delaying transactions to later blocks where market inefficiencies can be exploited for higher revenue.
• Flashbots: A system that allows MEV searchers and miners to communicate privately, reducing gas fee wars and improving fairness.
• Sandwich Attacks: Bots front-run and back-run a victim’s trade, increasing the asset’s price before selling at a profit.
• Liquidation Sniping: MEV bots monitor DeFi loans and execute liquidation transactions before others to claim liquidation fees.

Risks and Consequences of Front-Running

Front-running in cryptocurrency markets creates unfair advantages, leading to increased transaction costs, reduced trust, and market inefficiencies. It can also cause network congestion, higher gas fees, and unpredictable price movements, negatively impacting regular traders.

Market Manipulation and Unfair Trading

Front-running can contribute to market manipulation by distorting prices and interfering with fair trading conditions. Traders who use pending transactions to increase or decrease prices artificially are causing others to buy or sell at unfavorable rates. Also, transaction reordering by miners and MEV strategies opens up space for more manipulation by prioritizing profit-driven tactics over fair transaction execution.

The unfair trading environment caused by front-running affects retail investors, who don’t have the technological resources to react as quickly as more experienced traders. This imbalance makes the market feel untrustworthy, discouraging participation in decentralized finance (DeFi) and crypto trading in general.

A notable real-life example is the Ethereum “Frontrunner Jones” study, which analyzed this blockchain for more than five years. It identified 199,725 front-running attacks involving 1,580 attacker accounts and 526 bots, resulting in more than $18.41 million in profits.

Increased Transaction Costs

Front-running activity can also result in artificially higher trading costs. When front-runners find large pending trades, they can quickly place their transactions first, causing prices to rise. This pushes other traders to buy at artificially high rates or sell at lower values than usual.

To illustrate how this practice distorts prices, let’s imagine the following situation: a large investor plans to buy 500 ETH at a market price of $1,800 per ETH, for a total of $900,000. A front-runner finds this transaction in the mempool and immediately starts their buy order with a higher gas fee to guarantee priority execution.

By the time the investor’s transaction is finished, the price of ETH has jumped to $1,900 due to the front-runner’s earlier purchase. The front-runner then sells their 500 ETH at $1,900 per ETH, making an instant revenue of $50,000. Meanwhile, the investor, who originally was going to pay $900,000, now has to pay $950,000, resulting in an extra cost of $50,000 due to price manipulation.

Decreased Trust in DeFi and Crypto Markets

Front-running can compromise trust in DeFi by creating a hostile trading environment where some participants have advantages over others. This issue also contradicts the main values of blockchain technology, decentralization, and transparency by allowing certain traders, usually bots or miners, to manipulate transaction orders for profit. As users experience the consequences of these manipulations, confidence in DeFi platforms tends to diminish, resulting in skepticism about whether these markets are genuinely fair and open to everyone.

When users suffer artificially inflated prices, they may feel the system is working against them. Retail investors are disproportionately affected, as they don’t have the more sophisticated tools usually used by bots and high-frequency traders. Over time, frequent losses can push away users from DeFi platforms, reducing the chances of broader adoption and growth.

Security concerns are also an important piece of this puzzle since front-running takes advantage of vulnerabilities with blockchain protocols, making users question whether their assets are truly safe. While DeFi platforms guarantee that they offer decentralized and trustless financial systems, front-running shows that the networks can still be manipulated. If investors feel insecure, they can reduce their participation, resulting in less overall liquidity and market activity.

The Curve Finance incident is a great example of the risks and potential positive outcomes of front-running. In August 2022, attackers exploited vulnerabilities in the liquidity pools, trying to steal over $570,000 from the platform in assets. However, white hat hackers used front-running strategies to intercept and recover around 70% of the stolen funds. Even though front-running can be used for protective measures, DeFi protocols can be easily targeted by bad actors.

Protection Against Front Running

Individual users and blockchain networks are finding ways to prevent attackers from taking advantage of pending transactions. Governments and regulators are also looking at rules to help protect traders.

In the next sections, we will explain User-Level Protective Measures, which help traders keep their transactions safe, Protocol-Level Solutions, which improve blockchain systems to block front-running, and Regulatory and Ethical Considerations, which focus on how rules and guidelines can reduce unfair trading practices.

User-Level Protective Measures

Users can take several measures to protect themselves from front-running attacks. One method is using private or off-chain transactions, such as Flashbots, which allow traders to send transactions privately to miners. This prevents pending transactions from being visible to front-runners. Another similar strategy is MEV-protected services that encrypt transaction details until they are executed.

To protect themselves, users can also adjust slippage tolerance, which controls how much a trade’s price can change before it fails. Setting a low slippage tolerance (usually between 0.5% and 2%) can reduce the risk of price manipulation. However, the main advantage is that transactions will fail more frequently if the market moves too much, leading to wasted gas fees.

Using layer-2 solutions like Optimistic Rollup can also help by moving transactions off the main blockchain, making it harder for front-runners to find them. Another alternative is trading on less busy blockchains with faster transaction speeds and lower fees. Users can use platforms like Secret Network that focus on privacy, keeping the transaction details hidden until confirmation.

Finally, users can also execute batch transactions and delay mechanisms for extra protection. Grouping multiple trades together makes it harder for attackers to isolate and manipulate a single transaction. Delaying the transaction’s broadcast before execution guarantees that all trades have a fair chance of being included in the block without exploitation.

Protocol-Level Solutions

Protocol-level solutions protect users against front-running by making transaction order manipulation challenging or impossible. Batch auctions process several transactions at the same time, guaranteeing that they are all settled at the same price. This removes the front-running advantage of priority-based execution, resulting in unfair profits.

Similarly, CoW Protocol aggregates orders off-chain before settling them on-chain, using batch auctions and P2P trading to protect users from MEV attacks. These methods aim to reduce slippage, improve pricing, and prevent unfair trading practices.

Another important method is zero-knowledge transactions, which hide transaction details until they are settled. By preventing front-runners from finding trades that are still pending, these transactions reduce manipulation risk. Other methods, such as commit-reveal schemes and off-chain order relays, also improve security by delaying transactions’ visibility or executing trades in private batches.

Regulatory and Ethical Considerations

In traditional finance, front-running is strictly illegal and heavily regulated. For example, under SEC Rule 17(j)-1, financial professionals caught front-running can face fines, license revocation, or even jail. While crypto works in a more decentralized and unregulated space, authorities are starting to pay more attention and implement consequences. One example is the indictment of the Peraire-Bueno brothers, who allegedly used MEV strategies to profit millions through front-running practices.

Blockchain projects can design fairer systems by implementing technical solutions that make front-running more difficult. Some options are private transaction protocols that allow users to send trades directly to miners, keeping them private until they are confirmed, and batch auctions used by platforms such as the CoW protocol, which executes various transactions at the same time and at the same price. Other solutions, like MEV-protected services, encrypt transaction details until execution, preventing attackers from exploiting pending trades.

Conclusion

Front running in crypto occurs when someone uses insider knowledge of upcoming trades to profit unfairly, often by manipulating transaction order. It is common in DeFi, where bots exploit public blockchain data. Front running harms trust, raises costs for honest users, and challenges crypto’s fairness.

Future solutions aim to hide transaction details (like encrypted mempools) or enforce fair transaction ordering. Tech like zero-knowledge proofs and better regulations could help. These steps may reduce front running and build safer, fairer markets.

Ethical trading requires developers, traders, and platforms to prioritize fairness. Trust in crypto depends on transparency and accountability. By tackling front-running and valuing ethics, the community can uphold decentralization’s ideals and create a more inclusive financial system.

Frontrunning FAQs

References

• Frontrunner Jones and the Raiders of the Dark Forest: An Empirical Study of Frontrunning on the Ethereum Blockchain (Christofer Ferreira Torres)
• Crypto finance platform Curve faces breach, hackers to steal over $570k (Tech Circle)
• Code of Ethics (Rule 17j-1) (SEC)
• The First Project Report: What is the CoW Protocol for Anti-MEV Trading? (Chain Catcher)
• Who Is the Real Victim? When Front-Running Crypto Bots Lose at Their Own Game (Arnold and Porter)