Key Takeaways
- Front running is a malicious tactic where bots exploit unconfirmed transactions in the mempool to predict price changes and manipulate transaction order.
- Slippage bots monitor mempool data for large trades, prioritize their transactions with higher gas fees, and calculate the optimal trade size to maximize profits.
- In low-liquidity pools, bots detect and front-run large trades, leading to inflated token prices and reduced profitability for traders.
- Traders can minimize risks by adjusting slippage tolerance, breaking large trades into smaller ones, using high-liquidity pools, opting for private transactions, and paying higher gas fees.
If you’re active in crypto trading, your goal is likely to grow your portfolio by seizing the right opportunities. Many crypto traders use automated market makers (AMMs) and liquidity pools to facilitate token swaps. Despite thorough research and analysis, you might have experienced trades where your profit margins fell short of expectations.
If this sounds familiar, you may have encountered slippage bots and front running. This malicious tactic can undermine trades and profit but bots themselves can also suffer massive losses. In this article, we’ll dive into slippage bots and front running, how they work, and how you can protect yourself.
What Is Front Running in Crypto? Slippage Bots Explained
Front running in crypto occurs when a malicious entity exploits pending transactions in the mempool (a temporary storage area for unconfirmed blockchain transactions). By using this data, front-running bots can predict future price movements, then manipulate block ordering to profit from those changes.
For example, when a trader places a large transaction on an AMM, it can cause significant price slippage due to the pool’s low liquidity. MEV (Maximum Extractable Value) bots monitor the mempool to identify such transactions. They extract value from blockchain inefficiencies. analyze data at high speeds, detect opportunities, and execute transactions much faster than humans.
Once they detect an opportunity, MEV bots quickly submit a new transaction with higher gas fees, ensuring their transaction gets priority. The bot can buy assets before the large trade, causing the price to rise, and sell them at the inflated price once the initial trade goes through.
How Does Front Running Work
The mechanics of front running involve influencing the order of transactions in a block to ensure profitability. Here’s how it happens step by step:
- Analyze Mempool Data: Front-running bots monitor the mempool for unconfirmed transactions, scanning for large trades that could cause price slippage. By identifying these trades, the bot can predict how prices will change once the transaction is complete.
- Optimize Gas Fees: Bots submit their transactions with higher gas fees to incentivize miners to process their transactions first. This guarantees that their trades are prioritized over the original transaction.
- Calculate Ideal Transaction Size: Bots determine the optimal trade size to maximize profits while minimizing risks. They execute their trades before and after the target transaction (sandwich attack), ensuring they capture the value difference caused by slippage.
Crypto Front Running: An Example
Imagine you’re trading on a low-liquidity AMM with Token X. You decide to buy $10,000 worth of Token X, expecting a slight price increase. Before your transaction is confirmed, a front-running bot detects it in the mempool. Then, the bot immediately submits a buy order for Token X with a higher gas fee, ensuring it gets processed first. Your transaction follows, driving the price of Token X higher. The bot then sells its tokens at the inflated price, profiting from the price change caused by your trade.
As a result, you receive fewer tokens than expected, and your profitability is lower than expected.
5 Ways To Avoid Getting Scammed by Slippage Bots
Front running is a widespread problem within the crypto ecosystem. Despite that, there are a couple of steps that you can take to protect yourself. Here are three strategies to avoid falling victim to slippage bots:
- Adjust Slippage Tolerance: Most AMMs allow you to set slippage, which defines how much price fluctuation you’re willing to accept. Setting a lower slippage tolerance can help minimize the impact of front-running bots. However, very low slippage might cause your transaction to fail if the price fluctuates beyond the threshold.
- Split Large Trades into Smaller Transactions: Turning large trades into smaller transactions can make them less attractive to front-running bots. Smaller trades cause less slippage, reducing the potential profit for bots and making them less likely to target your transactions.
- Trade in High Liquidity Pools: Low liquidity pools are quite attractive to front runners. With not a whole lot of competition and bigger orders causing huge price spikes, they provide an ideal environment for front running. To reduce the risk of being targeted by a MEV bot, it’s best to steer clear of low liquidity pools whenever possible.
- Use Private Transactions: Some blockchains and dApps offer private transaction features that prevent your trades from being visible in the public mempool. This reduces the chances of bots detecting and front-running your transactions. Tools like Flashbots enable private trading by directly submitting transactions to nodes without broadcasting them publicly.
- Pay Higher Gas Fees: If you underpay gas fees, your transaction will likely remain in the queue longer, increasing the window of opportunity for front runners. To reduce your chances of being targeted, consider prioritizing your transaction by paying higher gas fees. You can do this by selecting the “fast” gas option in your wallet or manually setting the gas price above the average rate.
Closing Thoughts
Front running in crypto is a sophisticated tactic that utilizes the transparency of the blockchain for malicious gains. While it remains a significant challenge, understanding how it works and adopting preventive measures can help you protect your trades.
