As the prices of Bitcoin and Ethereum skyrocketed in the past few months, the decentralized cryptocurrency market saw a massive influx of new traders, especially stock market traders, who migrated to the cryptocurrency market in a bid to book profits.
What also moved with them are some traditional day trade strategies used in stock markets, which include breakout tactics to scalping (trading in small price movements without targeting massive profits). But one stock market tactic in particular that has proven popular for intra-day crypto traders is “front running”.
What is front-running?
Front-running, in stock trading and also in cryptocurrency trading, is the illegal practice of using insider information to make securities purchases knowing other purchasers are going to buy the same stock or currency and then sell it at a higher price. The key to this illegality is the non-public nature of the information being used by the purchaser.
In cryptocurrency transactions the practice is easier to get away with as once a DEX transaction is broadcast to the network, even before it’s included in a block, other users particularly, a bot, (short for “robot” an automated program that runs over the Internet) will spot the same opportunity. They charge in, bid a higher gas price so that a miner will include their transaction in a block first, and take the profit away from the trader.
“Front running on Defi is becoming even more complex and frankly depressing,” said Douglas Horn, Telos chief architect, and whitepaper author. “It started with individuals using bots to offer high gas fees to jump the line in front of high-value transactions. ”Rampantly used by Ethereum miners and trader bots, front running has fundamentally and unfortunately, evolved into multi-billion-dollar ethical malpractice of entering into an equity trade, option, futures contract, derivative, or security-based swap to capitalize on advance, non-public knowledge of a large pending transaction that will influence the price of the underlying security or coin.
As time progressed, the miners themselves inserted their front-running transactions while paying only the minimum gas fees (gas fees are shared with the many mining nodes working for a mining pool whereas front-running fees can be kept by the pool operators). With this, the mining pools operating the chain are extracting this value from users without their consent.