Front Running
Written by Jeff Kuan
Introduction
In the world of traditional finance, front-running is an illegal trading practice in which a broker, with advanced knowledge of a specific market order, enters into a trade in advance of the larger (pending) order that will influence the price of the underlying security. In practice it is a form of insider trading, as the broker profits from the run-up in price from the subsequent order.
In the context of cryptocurrencies, front-running is an issue with decentralized exchanges (DEXs). With DEXs, market information is public and trades take time to be confirmed (there is a delay between when trades are broadcasted vs. validated). Additionally users can pay slightly more in fees for transactions to be confirmed more quickly. As a result, DEXs make it easy for people to exploit temporary market inefficiencies for profit. A study conducted by Cornell Tech in August 2017 estimated the daily profit of a front-running bot to be as high as $2,500.
There are not yet any solutions to the front-running problem. The solution proposed by Gnosis is transaction batching, which eliminates the lag between transaction broadcast and validation by settling all trades for a given auction period simultaneously. Enigma’s proposed solution is a secure computational protocol, where network participants and worker nodes are unable to see transactions flowing to the network. The main downside of these is that they are not fully-decentralized solutions.
Suggested Reading
Front-running, Griefing and the Perils of Virtual Settlement (Part 1) by Will Warren
Front Running and its Effect on Decentralized Exchanges by Totle
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