Protecting Your Trades To Understanding Sandwich Attacks in MEV Trading Bot

Protecting Your Trades To Understanding Sandwich Attacks in MEV Trading Bot

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4 min read

Introduction
MEV stands for Maximal Extractable Value and has grown to becoming a very important concept. MEV stands for Miners and Validator Extractable Value, it is the amount of value that can be extracted by changing the order of transactions within the blocks. Of all the techniques used to take advantage of MEV trading bot, the sandwich attack has become popular to transact. This blog explores what sandwich attacks are, how they function, the effects they impose on users, and ways by which the risks of experiencing a sandwich attack can be contained.

What is a Sandwich Attack?
A sandwich attack takes place when an attacker mined two transactions around a pending transaction with the aim to gain a profit from the price change initiated by the original transaction.

How it Works:

Observation: The attacker watches the mempool, considering large buy orders since such operations have an impact on the token prices.

Front-Running: When the observed transaction is to be carried out, the attacker sets his or her own transaction to buy the same token at the going rate. This transaction is intended to occur before the victim’s order.

Victim’s Transaction: Once the attacker’s buy order is executed, the victim's larger order follows. This makes the token more expensive.

Back-Running: After the victim's transaction is executed and the price has risen, the attacker then sells the tokens they bought earlier at the high price, thereby profiting from the price difference.

Illustrative Example:

Step 1: A user wants to purchase 1,000 XYZ tokens at $1 each, leading to a significant demand that will increase the price.

Step 2: An attacker sees this transaction and places a buy order for 100 XYZ tokens at $1.

Step 3: The user’s order is executed, pushing the price to $1.10.

Step 4: The attacker then sells their 100 XYZ tokens at the new price of $1.10, making a profit of $10.

Impact of Sandwich Attacks on Users

Financial Losses:

The loss of users' money is the sandwich attacks' main impact. Through transaction price manipulation, attackers are able to reduce the worth of the initial trade by increasing the cost of transactions or by decreasing the revenue generated from the same.

Decreased Trust:

As sandwich attacks become more prevalent, users may lose trust in DeFi platforms. If traders believe that their transactions are at risk of being manipulated, they may be discouraged from using decentralized exchanges (DEXs) altogether.

Increased Transaction Costs:

Users may find themselves caught in “gas wars,” where they are forced to pay higher transaction fees to compete with attackers, leading to inflated transaction costs and reduced overall profitability.

Preventing Sandwich Attack Challenges

While it’s challenging to completely eliminate the risks associated with sandwich attacks, users can employ several strategies to minimize their exposure.

Use Limit Orders:

Instead of placing market orders, which are visible in the mempool, users can opt for limit orders. This way, their trades are not immediately exposed to potential attackers, reducing the chance of being targeted.

Choose MEV-Resistant Platforms:

Certain DeFi platforms are actively working on solutions to prevent MEV exploitation. Users should consider using platforms that offer features like transaction batching or private transaction pools, which can help mitigate the risk of sandwich attacks.

Utilize Flashbots:

Flashbots provide a more transparent and secure environment for executing transactions. By using Flashbots, users can submit their transactions in a way that prevents front-running and back-running, thus reducing the risk of sandwich attacks.

Increase Slippage Tolerance Wisely:

Setting a higher slippage tolerance can allow users to execute their transactions even if there is significant price movement. However, this comes with its own risks, as it may lead to unexpected losses.

Conclusion

Sandwich attacks represent a significant threat to users engaging in DeFi trading. As the industry continues to grow, understanding these strategies and their potential consequences is essential for users to protect their investments. By employing strategic measures and utilizing emerging technologies, users can avoid the risks of MEV exposure and navigate the DeFi landscape more confidently. As the DeFi ecosystem evolves, so too will the strategies to avoid these risks, emphasizing the need for continuous education and vigilance among traders.

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