Globally, cryptocurrency trading has become an important aspect of the financial landscape. Despite the potential for high returns, crypto markets are largely unregulated and decentralized, making them vulnerable to malicious activity.
Attacks such as the sandwich attack, devised by malicious actors to exploit decentralized finance (DeFi) protocols, are one such activity. In this article, we will discuss sandwich attacks on CRYPTO, how they work, and how to avoid them.
What Is a Sandwich Attack?
A sandwich attack is a type of front-running attack that occurs in the DeFi space, specifically on decentralized exchanges (DEXs) like Uniswap, SushiSwap, and others.
In a sandwich attack, the attacker manipulates the order of transactions in a way that they profit at the expense of other traders. The name “sandwich attack” comes from the way the attack is structured: the attacker’s transactions “sandwich” the victim’s transaction.
How Do Sandwich Attacks Work?
Understanding how DEXs process transactions is essential to understanding Sandwich Attacks In Crypto:
- Transaction Submission: Transactions are initially placed in a pool of pending transactions called the mempool after being submitted to a DEX.
- Transaction Ordering: Once all these transactions have been selected and ordered into blocks, they are added to the blockchain by miners or validators.
- Execution: When a block includes transactions, those transactions are executed in order.
An attacker using a sandwich attack strategically places their transactions around a victim’s transaction in order to exploit the mempool. Here’s how it works:
- Monitor the Mempool: The attacker detects large transactions that will impact a token’s price by monitoring the mempool.
- Front-Run the Victim: Prior to the victim’s transaction being executed, the attacker purchases the token. The price of the product rises as a result.
- Victim’s Transaction: Because the attacker ordered it at an inflated price, the victim’s transaction is executed at an inflated price.
- Back-Run the Victim: Once the attacker has purchased the tokens at a higher price, they sell them to lock in the profit.
The Impact of Sandwich Attacks
Financial Loss
Sandwich attacks primarily result in financial losses for the victims. After the attacker’s transactions, the price may fall back to its original level, causing the victim to lose money when selling their tokens.
Market Manipulation
Due to the artificial inflation of token prices created by sandwich attacks, price volatility can be significant. Investor confidence in DeFi protocols may be undermined in this situation.
Undermining Trust
Sandwich attacks are prevalent in the DeFi ecosystem and can erode trust in decentralized exchanges. If investors believe these platforms are full of manipulation and unfair practices, they may be reluctant to participate.
Real-World Example
Uniswap is a great cryptocurrency exchange for investors who want to buy large amounts of tokens. The DEX accepts a transaction from them.
In an attack, an attacker monitors the mempool and predicts that the transaction will push the price of the token higher. The attacker quickly submits a buy order before the investor’s transaction, causing the token’s price to increase.
When the investor’s transaction is executed, they buy at a higher price. Immediately after, the attacker sells their tokens at this inflated price, making a profit at the expense of the investor.
How to Avoid Sandwich Attacks
Although sandwich attacks are a sophisticated threat, traders and developers can mitigate the risk by following the following strategies:
Slippage Tolerance
To prevent sandwich attacks, it is important to adjust slippage tolerance settings on a DEX when executing trades. In financial trading, slippage tolerance refers to the difference between expected and actual prices at which a trade is executed.
When traders set a lower slippage tolerance, they can avoid being sandwiched if the price moves too much.
Gas Fees
Ethereum and other networks are prioritized by miners based on the gas fees associated with transactions. Trading with a high gas fee increases the likelihood of transactions being processed rapidly, thus reducing attack window opportunities.
Flashbots
In addition, Flashbots works on mitigating the negative externalities created by current MEV extraction techniques, as well as avoiding the existential risks that MEV could pose to state-rich blockchains like Ethereum.
Through Flashbots, traders can submit transactions directly to miners without having to go through the public mempool, thereby reducing the risk of front-running and sandwich attacks.
Decentralized Exchange Aggregators
In order to find the best DEX rates, traders can use decentralized exchange aggregators like 1inch or Paraswap. Using trade aggregators, attackers have a harder time targeting a specific trade because they split the trade across several exchanges.
Time-Based Trading
By executing trades at unpredictably unpredictable times, sandwich attacks can be less likely to target you. A trader could avoid placing large orders during times of high activity when attackers will be more attentive to the mempool.
Smart Contract Solutions
It is possible for developers to mitigate sandwich attacks with a variety of smart contract-based solutions. Here are a few examples:
- Commit-Reveal Schemes: Trades begin by submitting a hash of their transaction details, and then the actual transaction is revealed later. In this way, attackers can’t predict front-run transactions.
- Batch Auctions: Different transactions are processed simultaneously, which increases the difficulty of identifying specific transactions by attackers.
Education and Awareness
It is imperative that traders become aware of the risks and mechanics of sandwich attacks. Trades can be protected by understanding the mechanisms behind these attacks and taking steps to protect themselves.
This will allow traders to make more informed decisions and reduce their vulnerability to such exploits.
Also Read:
- How Important Is Liquidity In Crypto? How It Impacts Market Stability?
- What is Hamster Combo? What You Can Get?
- How to Do Option Trading in Crypto in India (Beginners)
- Top Tap to Earn Crypro Mining Bots
So, that’s all we have for you. What Are Sandwich Attacks In Crypto? How To Avoid Them? We hope that this guide has helped you. But that’s not the end of the conversation about the crypto world. You should comment below and let us know what your thoughts are about it.
