Unpacking Frontrunning and the Growing Trend of MEV
Brief article to understand one of the main attack vectors in dex.
Front-running and MEV (Miner Extracted Value) are two important concepts in the world of blockchain and cryptocurrency. They both revolve around the idea of taking advantage of information asymmetry for personal gain. While some people use these tactics to make money, others see them as unethical and potentially harmful. So let's dive into these topics and see what they're all about!
MEV 🤖
It refers to the profit that miners can make by manipulating the order of transactions in a block. Since miners have control over which transactions are included in a block and the order in which they are processed, they will process transactions that benefit them the most.
Front-Running 🥷🏻
Front-running occurs when a trader, investor or bot notices a pending transaction on the Mempool and uses that information to his or her advantage.
In the context of arbitrage, this can lead to profitable trades by taking advantage of small differences in price between different exchanges. A bot that uses front running for arbitrage would constantly monitor multiple exchanges for incoming orders and attempt to place trades on these exchanges before the orders are executed. This requires the bot to have fast and reliable access to exchange data and the ability to place trades quickly in order to take advantage of price discrepancies.
So, yes there it's much more to talk about the use cases, but let's leave that for upcoming articles.
Relation between the concepts 👾
Front-running can be one way for developers to take advantage of MEV, by identifying pending transactions that offer potential opportunities for profit, traders can front-run those transactions and potentially make a profit before the transaction is even confirmed.
Example
- Alice wants to buy 1000 ETH.
- Alice broadcasts this transaction to the network.
- Bob notices this transaction on the Mempool, before it is confirmed.
- Bob decides to buy 1000 ETH before Alice's transaction goes through, by paying more gas fees.
- Bob buys the asset at a lower price.
- Alice's buy transaction gets processed.
- Bob sells the asset at a higher price and makes a profit.
This type of behavior has become more prevalent with the rise of decentralized exchanges, which can be more vulnerable to front-running and MEV than centralized exchanges.
While some people see these tactics as a way to outsmart the market, others argue that they are unethical and can harm other users. Ultimately, it is up to the community to weigh the risks and benefits of these tactics and decide how to regulate them appropriately.