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All you need to know about front-running in crypto trading

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.

October 17, 2021 / 02:23 PM IST

Back in the day, when trading on the stock exchanges was a chaotic affair, with transactions taking place between pieces of paper and hoarse screams, a particular intra-day trading tactic, namely “front-running” was extremely popular.

Here’s what happened. The person in question waited and watched, with bated breath, as a major trade, like someone purchasing a huge amount of shares was being executed. 

On the back of this prior information and non-publicly accessible data that gave them an edge over others, the individual would slip ahead of other traders and race to the front at the very last minute, having figured out how to book massive profits. 

And you’d think that it would not be an issue in today’s time of decentralized finance, but that's far from true. You see, traders have the option to keep a close eye on the mempool on the decentralized exchange (DEX), which is essentially a platform where all valid transactions are listed and publicly available, awaiting confirmation by the Bitcoin network. A high mempool size is indicative of longer confirmation time, higher priority fee, and greater network congestion. 

Thus, everyone on the network can know well in advance if there is a major, substantial trade is coming up. 

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At this point, the front-runners broadcast their own exchange and using automated bots, attempt to push their transactions further from the aforementioned exchange by bidding a higher gas price so that a miner will prioritize the inclusion of their transaction, hence benefitting at their expense. 

“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. 

He continued “As time progressed, the miners themselves inserted their own 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.”

To present an effective counter to this malice and to comprehensively insulate institutional and large-scale traders from front runners, Telos has come up with a non-Ethereum fork, EVM (Ethereum Virtual Machine) that is capable of running existing Solidity and Vyper contracts without modification, just like Ethereum, with the added advantage of 30X greater speed, greater than 100X higher capacity, around 1 percent of the cost of Ethereum gas fees, transaction fees that allows for even sub-dollar transactions and around 31mm times less energy consumption per transaction. 

“Ethereum 2.0 did not ease the front-running concerns for institutional investors to go big into crypto investments. Miners keep skipping the line and increasing their spread and de facto stealing millions of dollars. Telos EVM is faster, better, cheaper, and functions on a first-come, first-serve basis. The simplicity of integrating with Metamask allows investors to trade as safely as they are used to on NASDAQ”, elaborated Horn. 
Ira Puranik

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