Understanding and Combatting Frontrunning in DeFi

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Introduction

In traditional finance (TradFi), frontrunning involves brokers exploiting upcoming trades based on prior knowledge. This practice, while old in stock markets, takes a more complex form in decentralized finance (DeFi) due to the public nature of blockchain transactions. Platforms like Robinhood have been criticized for similar practices by selling customer transaction data to brokers ahead of trade executions.

Frontrunning in DeFi Explained

On blockchains like Ethereum, transactions including token transfers, smart contract interactions, or contract deployments are public. Before being confirmed, these transactions wait in a public pool (mempool), visible to anyone, allowing for potential exploitation.

Frontrunning Tactics in DeFi

Frontrunning bots monitor the mempool, identifying profitable transactions to replicate and execute before the original, often by offering higher gas fees. This can be seen in various strategies:

  • Displacement Attack: Bots register domains or claim rewards intended by genuine users by spotting and executing transactions ahead of the original ones.
  • Sandwich Attack: Bots execute transactions before and after a genuine transaction to profit, such as buying an NFT before a user and selling it to them at a higher price.

Protecting Against Frontrunning

  • Commit and Reveal Scheme: This method involves initially sending a hashed version of the transaction, concealing the details from potential frontrunners, followed by revealing the transaction details for execution.
  • Smart Contract Design: Adjusting contracts to ensure transaction order doesn’t advantage frontrunners, such as modifying the ERC20 approve method to require an expected current allowance, preventing unauthorized changes.
  • Private Transactions: Utilizing services like FlashBots Auction allows for private transaction submission, bypassing the public mempool and avoiding frontrunner attention.

Conclusion

Frontrunning poses a significant threat in DeFi, exploiting the transparency of blockchain transactions. However, with smart contract adjustments, commit-reveal schemes, and privacy-focused transaction methods, users can safeguard their activities from such predatory practices.

For a more detailed exploration of frontrunning in DeFi, including its mechanics, attack strategies, and defensive measures, read the full post on Olympix’s Medium HERE

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