Crypto Front-Running: What it is and How to Avoid it
Have you ever tried to make a trade and face a message saying "your transaction may be front-run?" Cryptocurrency traders have to be aware of the risk of front-running. This is when someone takes advantage of knowledge about an upcoming trade to buy or sell ahead of time, and then profits from the resulting price change. In this article, we will discuss what front-running is, how it can be detected, and how traders can avoid it.
What is front-running in crypto?
The concept of front-running may seem complex, but in reality, it is quite simple. Generally speaking, front-running occurs when someone has knowledge about a pending trade that will affect the price of a particular cryptocurrency. This happens in traditional stock investments as well as the crypto market.
For example, let's say that you are a trader who knows that there is an upcoming purchase of 10,000 BTC from one party and a simultaneous sale of 10,000 BTC to another party. Knowing this information gives you the opportunity to buy up some of those 10,000 BTC before they officially hit the market, which increases your chance of making a profit when the price inevitably rises after the official trades have been made. These people who attempt to front-run are usually called 'rushing adversaries'.
In any case, there have been detailed studies made on the history of front-running, how it works in the crypto space, and ways to mitigate it.
There are also front-running bots. The Ethereum blockchain's design allows for all submitted transactions to be stored in a pool where they wait patiently until someone performs an action on them. This gives the miner or bot involved with executing these tasks access before any other user does, which can lead to some pretty lucrative opportunities.
How to avoid front-running
There are ways to detect front-running activity in order to minimize your exposure to this risk. One common method is to use front-running detection tools, which are designed to monitor trading activity and alert users when they spot suspicious activity. These tools typically analyze a wide range of data points such as price, volume, and order size in order to identify potential front-runners.
If you want to avoid the risk of front-running, then it is important to be aware of the various tactics that can be used by front-runners. For example, some front-runners might attempt to manipulate the market by driving up prices with small buy orders before closing out those positions at higher rates. Others may engage in "spoofing," which involves placing fake orders that are then canceled before they can be executed, in order to create the appearance of increased trading activity.
In order to avoid front running, there are four simple things that you can do on DEXs:
- Avoid low liquidity pools
- Set low slippage
- Pay for the higher gas fee
- Place smaller orders
In order to effectively protect yourself from front-running and other forms of market manipulation, it is essential to stay informed about current trends in cryptocurrency trading, and to use tools like front-running detection software whenever possible. With vigilance and careful analysis, you can minimize your risk of being adversely affected by front-runners and maximize your chances of generating successful trades.