Understanding Blockchain Security: Front Running and Sandwich Attacks in DeFi

Introduction

Welcome to our latest discussion in our DeFi series. This post will explore front-running and sandwich attacks - critical vulnerabilities in decentralized finance (DeFi) systems.

Overview of DeFi

Before we dive into the specifics, let’s briefly recap what DeFi is. Decentralized Finance (DeFi) represents a new paradigm in financial markets, leveraging blockchain technology to create an open and permissionless financial system. Unlike traditional finance, DeFi operates without a central authority, relying on smart contracts and decentralized protocols. This decentralized nature means multiple parties can participate in transactions, ensuring transparency and reducing the need for intermediaries.

What is Front Running?

Front running is a type of vulnerability that exploits the architecture of blockchain networks like Ethereum. It involves executing a transaction before another pending transaction to gain an advantage. This vulnerability is not exclusive to DeFi but is prevalent due to the transparent nature of blockchain transactions.

How Does Front Running Work?

In Ethereum, transactions are placed in a mempool (memory pool) before being executed. The mempool is a public queue where all pending transactions wait to be processed. Transactions are not necessarily processed in the order they arrive; instead, they are prioritized based on the gas fee paid. Higher gas fees result in faster transaction processing.

Thought Demonstration

Jennifer demonstrates a front running attack using a Solidity-based game. The game requires participants to pay an entry fee and choose an option to win a prize. If a participant selects the correct option, their transaction is processed, and they win the prize. However, an attacker can monitor the mempool, see the participant’s correct transaction, and replicate it with a higher gas fee, ensuring their transaction is processed first. The attacker wins the prize, and the original participant’s transaction is reverted.

Mitigating Front Running

To prevent front running, developers can implement a commit-reveal scheme in smart contracts. This involves users first sending a hashed version of their answer and then revealing the answer in a subsequent transaction. This approach ensures that the initial transaction’s details are concealed, preventing attackers from exploiting it.

What is a Sandwich Attack?

A sandwich attack is another form of vulnerability that exploits transaction ordering. It involves an attacker placing two transactions around a victim’s transaction to manipulate the price of a token or asset. This technique is commonly used in automated market maker (AMM) protocols within DeFi.

How Does a Sandwich Attack Work?

In a sandwich attack, the attacker identifies a victim’s pending transaction to buy a token. The attacker then submits a buy transaction with a higher gas fee, causing their transaction to be processed first. This initial buy raises the token’s price. The victim’s transaction is then processed at the higher price, and finally, the attacker submits a sell transaction to capitalize on the increased price, profiting from the victim’s purchase.

Thought Demonstration

Using a vulnerable smart contract, Jennifer demonstrates a sandwich attack. The smart contract adjusts token prices based on supply and demand. An attacker can buy tokens at the current price, wait for the victim’s transaction to increase the price, and then sell the tokens at the higher price, pocketing the difference.

Mitigating Sandwich Attacks

Mitigating sandwich attacks involves designing smart contracts that minimize transaction ordering vulnerabilities. One approach is to use techniques that obscure transaction details or introduce randomness in transaction processing to make it harder for attackers to predict and exploit the transaction flow.

In conclusion

Front running and sandwich attacks are significant vulnerabilities in the DeFi space, exploiting the transparent and decentralized nature of blockchain networks. Understanding these attacks and implementing robust security measures, such as commit-reveal schemes and transaction obfuscation, is crucial for developers to protect their smart contracts and users.

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