Financially Exploiting the Blockchain with Frontrunning
What if you could make USD 1,000,000 in 30 minutes on the blockchain with some scripts, insider knowledge, and the right timing? Unethical, illegal, and difficult to prevent, this threat to the defi is called frontrunning.
Frontrunning is a common prohibited practice in financial markets, like insider trading, which traders use to make blockchain trades based on non-public information. In the blockchain, traders use the data of pending transactions to maximize profits before the data is confirmed. Attackers can gain knowledge of pending transactions through various methods depending on the underlying technology. Ultimately the goal is to jump in with their trade to be part of the next block in the transaction. By taking advantage of ordering dependence, they can insert transactions that will maximize gains.
A blockchain that is vulnerable to frontrunning could have its blockchain-asset market price influenced and its reputation and consumer confidence tarnished. But despite the well-known methods of frontrunning, many organizations are not prepared with the experience necessary to prevent this unethical and illegal market manipulation.
Frontrunning attacks against blockchain systems play a crucial role in enabling other kinds of attack vectors. These attacks are common on public blockchains and are launched by bots that are using the data from the transaction pool to insert buy/sell orders in decentralized exchanges in a way that maximizes their profits. Additionally, frontrunning has been used as a platform to perform Denial of Service and Impersonation attacks on production systems.
Even more concerning is that the concepts behind frontrunning are specific to financial transaction software and systems, leading to specialized expertise to support organizations in preventing this form of exploitation. Some organizations have even gone as far as hiring frontrunners themselves to address the vulnerability. And as the vulnerabilities often stem from architectural decisions, they require architectural security solutions that often come down to the specific contract itself.
Despite this risk’s commonality, there are no mechanisms in place today to detect the use of knowledge as part of a transaction. And as this vulnerability rarely impacts traditional software systems, existing enterprise protection systems do not cover these types of vulnerabilities. Beyond that, there are no established tools that identify the anomalous behavior of transactions ordering, as current enterprise systems don’t have visibility into on-chain ordering. This lack of security controls and notification systems leads developers to explore gas price limitations and other unique methods to stay ahead of the frontrunners. But these methods often have adverse side effects like skyrocketing gas prices, impacting regular trader use and gains.
But there is hope. As enterprise adoption of blockchain technology continues into regular applications, organizations also need to be looking at the security and risks that come with the decentralized network. In this case, by adopting a security mindset with oversight and monitoring of transaction backlogs and the mempool, enterprises can detect and respond to this financial-gain attack before the impact is much more significant.
Investing in enterprise blockchain security teams and services to stay ahead of these and other attacks helps establish the culture and process of a blockchain security mindset. These blockchain security teams can set protections to detect, prevent, and respond to frontrunning, working not only with developers but traders to establish the necessary constraints to remove the profitability and impact of frontrunning from the very beginning.
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