What Is The Defi Term For An Exploit Where A Trader’s Transaction Is Surrounded By Other Trades To Make A Profit?

In this article Tackle the Heading “What DeFi Exploit Is DeFi Exploit DeFi Exploit Only In Sandwich Forms? Exploit In Only Sandwich Forms?”

A trader who falls victim to the DeFi exploit known as sandwich attack will find attackers manipulating their trades by placing orders right before and after theirs.

Overview

As technology progresses, particularly with Decentralized Finance (“DeFi”), new trading strategies, and even new exploitable transactions, are developing alongside it.

One of those prominent exploits are “Sandwich Attacks,” where a trader’s transaction is buffered with other transactions to extract profit.

Like many other exploits, it has now gotten widespread attention and is now particularly popular within the DeFi ecosystem.

Understanding the Concept of Sandwich Attacks in DeFi

A sandwich attack is a type of front-running attack where an attacker alters the sequence of transactions in a blockchain in order to profit from another trader’s loss.

The attacker puts two transactions around their victim’s transaction—one before and the other after, hence, sandwiching the victim’s transaction.

This method is very rampant in DEX that utilizes AMM, for example, Uniswap and SushiSwap. These exchanges allow the order of execution and the amount of price slippage to be used in a way that facilitates exploitation.

How Does a Sandwich Attack Work?

In order to understand how a sandwich attack works, it is best to break down the process into smaller parts:

Identifying a Target Transaction:

An attacker scans the mempool, where all the pending transactions are sitting idle. The attacker starts by looking for a large pending transaction, especially one that is likely to bring a change to the price of tokens.

Front Running Transaction:

In this stage the attacker will place a buy order just before the victim is set to execute their buy order. The price for the tokens becomes higher due to the attacker’s buy order placed.

Victim’s Transaction Execution:

The price for the tokens is higher by the time the victim executed their trade. This is as a result of the attacker’s preceding buy order.

Back-Running Transaction:

After the victim completes their trade, the attacker places a subsequent sell order following the victim’s sell order. This enables the attacker to sell the tokens and profit from the sell order placed by the victim.

The attacker profits at the victim’s expense by encasing the victim’s trade with their buy and sell order. Consequently, the victim incurs a loss in either paying more through buying or receiving a lesser value when selling, owing to the price being manipulated.

What Enables Sandwich Attacks in DeFi?

The following unique characteristics of decentralized exchanges and blockchain technology constitute reasons why sandwich attacks may be executed:

Visibility of the Mempool and Transactions:

The Mempool is the pool of unconfirmed transactions. Anyone has access to the Mempool, hence, all unconfirmed transactions. This visibility poses the risk of attackers noticing big transactions and taking advantage of them.

Transaction Ordering:

Usually, miners and/or validators of blocks will order transactions based on the gas offered. To ensure that their back and front run transactions are executed at optimal times, attackers will bid higher gas fees.

AMM (Automated Market Makers):

AMM’s use liquidity pools and price algorithms to calculate the value of the tokens. This creates the possibility of sandwich slippage from the trade through the drastic alteration in price that a trade can bring.

Consequences of Sandwich Attacks

Sandwich attacks cause loss of value to traders and the entire DeFi force by:

Increasing Transaction Costs:

Victims are forced to pay more for tokens or are paid less like in the case of selling their tokens due to price manipulation.

Decreasing Market Efficiency:

Manifold trading reduces fair pricing and liquidity while offering manipulative trading, which in turns reduces trust in the platform.

Raising Barriers for Small Traders:

Disproportionately puts smaller traders at a disadvantage due to the inability to compete with the high gas fees or advanced front-running bots.

How to Reduce the Risk of Sandwich Attacks?

Due to the nature of blockchain providing complete transparency, it is difficult to fully eliminate sandwich attacks. However, these strategies could lessen their impact.

Set Slippage Tolerance:

Setting the slippage tolerance to a smaller value leads to price manipulation and greater control over the trade not being executed at slippage prices.

Private or Layer 2 Solutions:

These and a few other platforms allow for the submission of transactions privately, hugely limiting the exposure to the mempool.

Batch Auctions along with Fair Ordering Protocols:

Some emerging DeFi protocols are testing other ways to arrange transactions to avoid being front-run which is part of the transaction ordering that they are trying to prevent.

Gas Price Strategies:

By changing the gas prices and the timing of when to do so to around their transactions, the users are able to make it more difficult for attackers to act around them.

Conclusion

In DeFi, the term sandwich attack is used as the term for the exploit in which a traders transaction is enclosed in other trades in a bid to make a profit.

This exploit takes advantage of mempools’ transparency, the transaction ordering system, Automated Market Makers (AMMs) pricing, and other approaches to profit off traders’ ill-fated decisions.

Undoubtedly, as DeFi continues to develop, greater awareness, as well as technical innovations, is important to reduce the impact of sandwich attacks and promote an equitable and effective decentralized financial ecosystem.

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