Front Running

Front running is a term commonly used in the blockchain industry, but what does it actually mean? In simple terms, front running refers to the act of placing a transaction in a queue with prior knowledge of a future transaction. This unethical practice occurs when someone takes advantage of information about pending transactions to gain an unfair advantage.

Front running is particularly relevant in the context of blockchain platforms, such as Ethereum. As a decentralized network, Ethereum relies on miners to validate and add transactions to the blockchain. These miners have access to information about pending trades and can strategically place their own orders based on this information.

Let’s take a closer look at how front running can occur on the Ethereum blockchain. When a user submits a transaction to the network, they include a gas price to incentivize miners to prioritize their transaction. Bots or miners who engage in front running can quote a higher gas price than the pending trade, effectively speeding up the processing of their own transaction while delaying the original one. This allows the front runner to take advantage of market movements or execute trades before others, potentially profiting at the expense of others.

It is important to note that various entities can engage in front running. Full node operators, who monitor network activities and have knowledge of unconfirmed transactions, can also take part in front running. However, it is less likely for centralized exchanges to conduct front running since it would be counterproductive for them to cheat their own customers. Nevertheless, front running can also be orchestrated through other methods, such as generalized front running that takes advantage of potentially profitable contract calls.

Front running attacks can take different forms, including displacement, insertion, and suppression attacks. In a displacement attack, a malicious actor replaces a genuine transaction with their own. Although the original transaction may still proceed, it will not have the intended positive effect. An insertion attack, on the other hand, involves sandwiching a genuine transaction between two transactions with the aim of making a profit without holding an asset. Lastly, a suppression attack aims to delay others from executing a transaction, with the front runner being less concerned about the suppressed trade once the withholding is lifted.

Now that we understand what front running is and how it can occur, let’s explore some potential ways to mitigate this issue. One approach is to sequence transactions in a way that prevents front running. For example, the Bitcoin Cash (BCH) network has implemented the Canonical Transaction Ordering Rule, which specifies the order of transactions in a block. By establishing a specific order, front running becomes more difficult.

Another way to mitigate front running is by enhancing transaction confidentiality. In a decentralized application (DApp), different sections can be protected to ensure sensitive information remains private. By encrypting certain data and restricting access only to authorized parties, the potential for front running is reduced.

As the blockchain industry continues to evolve, it is important for developers, users, and regulators to be aware of the challenges posed by front running. While there are measures that can be taken to mitigate this issue, it is crucial to strike a balance between privacy and transparency in order to maintain the integrity of blockchain networks.