Front Running in the context of cryptocurrency is a trading strategy where individuals or entities use their access to information about pending transactions to execute orders that profit from these upcoming trades. Typically occurring on blockchain platforms, front running exploits the transparency of pending transactions in decentralized finance (DeFi) protocols.
In blockchain environments like Ethereum, front running can happen when miners, who have access to data about unconfirmed transactions, or bots capable of quoting a higher gas price, use this information to their advantage. They execute their own transactions ahead of the pending ones, capitalizing on the anticipated price movement that the initial transaction will cause.
Front running is not limited to miners; it can also be executed by full node operators or even by decentralized exchanges (DEXs). Various methods, such as displacement, insertion, and suppression, are employed. Displacement involves replacing a genuine transaction with the attacker’s transaction, while insertion strategically places the attacker’s transaction around a genuine one to make a profit. Suppression aims to delay other transactions to benefit the front runner.
While front running in traditional financial markets is illegal and unethical, it falls into a gray area in crypto markets due to the public nature of blockchain transaction data. In DeFi, front running often involves monitoring and exploiting the mempool, a holding area for unconfirmed transactions, to gain an advantage.
To mitigate front running, various methods like transaction sequencing, improving transaction confidentiality, and employing privacy-focused solutions like private mempools are used. These measures aim to obscure transaction details from potential front runners, thereby preserving the integrity and fairness of the trading process on decentralized platforms.