A sandwich attack is a crypto transaction-based attack that targets pending transactions in a DeFi network. It occurs on the blockchain and takes advantage of the visibility of pending transactions, while attackers can manipulate prices to generate profits for regular users. The strategy makes significant threats to decentralized exchanges or other platforms that operate in an open and competitive environment.
In this blog, let us delve into the sandwich attack, its strategy, harms, and the methodology used to avoid those attacks. We can also talk about the risks faced by the overall Defi network and the best practices to avoid these in India’s leading crypto exchanges.
What is Sandwich attack?
A sandwich attack takes place on a pending transaction on a blockchain. It occurs when an attacker sees a large number of pending transactions on a decentralized network. The attacker places two orders around it, one before and one after the victim’s trade.
The outline of the basic process of the Sandwich attack is as follows
The attacker first identifies a large transaction on the DEX Platform to be confirmed.
The attacker charges a higher gas fee before the transaction is executed, which increases the price. This is called Front-running.
The final one is the back-running process. While the victim places his order at a highly inflated price, the attacker sells their token at a higher price, capitalizing on the victim’s purchase.
Supposing a trader wants to buy a token with 100 units, the attacker utilizes this to buy tokens before the trade, driving the price to 105. The attacker sells the token at this inflated rate, and the victim unknowingly pays the higher price.
How does the Sandwich attack happen on DeFi Platforms?
In DeFi Protocols, trades are operated on automated market makers (AMMs), which are based on algorithmically determined prices. DEX is not based on traditional exchanges; they do not have order books but rely on liquidity pools and pricing algorithms.
The sandwich attacks leverage the public due to the blockchain’s transparent nature. Anyone can view the pending transactions and take advantage of them. The larger trade causes most price slippage, which involves manipulating the price based on its liquidity pools.
Impact on Users
The first consequence of a sandwich attack is the loss of funds for the actual holder, meaning that he buys tokens at a much higher price. This loss can be higher and reasonably significant, especially in big trades when the sizes of stocks are relatively low in regard to the overall daily turnover, and hence, the price movement affected by a single trade is bigger. Also, sandwich attacks make the market inefficient because they artificially induce price fluctuations and discourage users from investing in DeFi projects.
Why Sandwich Attacks are Prevalent in DeFi
This attack is especially effective with most decentralized DeFi platforms because of the relatively distributed control system. It is worth noting that Frontrunning is prohibited and closely monitored in traditional finance, while in DeFi, Frontrunning is easy since the principal actors remain anonymous, making enforcement of such regulation nearly impossible. In Ethereum and other such blockchains, it is commonplace to sort transactions based on gas fees, so attackers can pay slightly higher gas fees to ensure their frontrunning place is secure.
The other reason is that the quantity of trading on most DeFi exchanges is substantially lower than that of centralized exchanges. Low liquidity implies that trades have a bigger price effect, making it possible for an attacker to shift the price upward significantly.
How best can one spot a Sandwich Attack?
This is because it becomes cumbersome for newcomers to identify the incidence of sandwich attacks. Here are a few signs to look out for:
Sudden Price Swings:
If suddenly the price changes before entering a transaction, then you might be a victim of a front-run attack.
High Gas Fees:
Sometimes, the gas fees for a trade are relatively high for some reason, which may be an attempt at Frontrunning.
Irregular Transaction Patterns:
Patterns in a DEX’s order book, for example, where small buy-sell orders are placed before or after a big transaction, are very easily identified.
Putting an End to Sandwich Attacks in Crypto Trading
Given the risks involved, traders need to employ strategies that mitigate the likelihood of being attacked:
Limit Orders: Limits orders rather than market orders should be employed to avoid sandwich attacks. They cap a price to which one is willing to buy or a price at which one is willing to sell, and therefore if an attacker seeks to manipulate the price, we don’t go past that price that has been set.
Reduce Slippage Tolerance: Most DEXs provide a slider labeled ‘slippage tolerance’ through which users set the limit within which they can afford to trade. When a low slippage tolerance is set, the attacker has little say regarding the price change.
Use Private or Dark Pools: Certain trading options are given in “dark pools,” where trades happen behind closed doors or are concealed from the market. This also serves to counter-check the defenders and keep off potential attackers who would be tracking pending trades.
Flashbots: Flashbots are an advanced bidding technology that allows users to submit their transactions straight to the miners. Successful front running can no longer occur because traders can make their transactions invisible by using Flashbots. The Relevance of Sandwich Attacks for the Indian Crypto Community.
India has seen widespread adoption as many exchanges and trading platforms have sprouted, so understanding how these attacks work and how to prevent them is paramount.
Popular Cryptocurrency Exchanges in India: While CEXs such as WazirX, Bitcoiva, CoinSwitch Kuber, and CoinDCX are more secure and preferable for first-time users, DEXs attract users who want to maintain their private keys and have direct control over their assets. The more Indian traders engage in DeFi, the more they are subjected to risks such as sandwich attacks, which are more rampant in decentralized arenas than in centralized exchanges.
CEXs are usually less vulnerable to sandwich attacks because they do not work in the public domain. However, they keep their own order books and trade within their own organization and often face additional layers of regulation. Hence, Indian traders have no choice but to seek out other safe and transparent CEXs to engage in DeFi without being susceptible to front running.
Policing the Cryptocurrency Space: The Role of Indian Cryptocurrency Exchanges
The best cryptocurrency exchanges in India, like WazirX, Bitcoiva, CoinDCX, and ZebPay, can play an active role in educating their users about DeFi risks and helping them take appropriate precautions:
Educational Resources: Exchanges can provide information on safe trading to demonstrate causes of vulnerability concerning DeFi trading.
Partnerships with DeFi Projects: Some partnerships between exchanges and DeFi projects provide safe trading conditions for users by sharing knowledge about protection tools, such as Flashbots.
Enhanced Security Measures: Certain CEX might be looking for a method of enabling DeFi with additional layers of security to reduce some risks, such as sandwich decks while granting customers access to decentralized resources.
The following are some aspects of DeFi and the concepts to address the Sandwich Attack Method in the future.
That is even as new solutions are being created to defeat sandwich attacks and other frontrunning schemes fueled by the growing complexity of DeFi. Current blockchain projects and exchanges are still trying to find a solution to protect the transaction procedure and enhance liquidity and the lack of fragmentation of the agreement, which can certainly wipe out the large selling and prevent Frontrunning.
Lack of awareness and education of the public must both be stepped up in countries such as India, where discussions regarding the regulation of cryptocurrencies are still a topic of debate. Understanding how sandwich attacks work and the distinct benefits of different trading platforms, such as CEX and DEX, will also assist other Indian traders in making better choices when using cryptocurrencies.
Final Thoughts
In sum, sandwich attacks are a popular type of Frontrunning, with assistance from the open nature of blockchain transactions. Since DEXs are platforms through which Indian traders engage with DeFi, it is essential to learn about risks relative to sandwich attacks and the use of protection measures. Many centralized exchanges are safe from sandwich attacks, and some need to inform their customers about decentralized finance, and others should look into a mix of centralized and decentralized systems.
However, the right strategy is to wait for the situation to normalize and choose the best cryptocurrency exchange in India that has informative and security supplies at the moment. In this way, Indian traders will be able to tap the crypto market without much risk and with confidence.
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