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What are Sandwich Attacks in DeFi?
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Explore sandwich attacks, how they are executed, their effects on the market, and strategies for protection against them.
Sandwich attacks have become an increasingly common threat to decentralized finance (DeFi) traders. While not as prevalent as rug pulls, sandwich attacks have a malicious design that undermines the stability of the DeFi ecosystem, especially on trading platforms. Sandwich attacks exploit the mechanics of decentralized exchanges (DEXs) and take advantage of traders, particularly those who may not fully understand the risks involved in their transactions. This article explores the concept of sandwich attacks, how they are executed, their effects on the market, and strategies for protection against them.
Before You Get Started
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What Is a Sandwich Attack?
A sandwich attack is a form of malicious trading that targets users on decentralized exchanges. Sandwich attacks involve two transactions that "sandwich" a victim's trade: one transaction is executed before the victim's trade (known as frontrunning), and another is executed immediately after (known as backrunning).
The goal is to manipulate the price of an asset to profit at the expense of the unsuspecting trader. Attackers use the visibility of pending transactions in the public mempool to execute trades that exploit price movements caused by the victim's order.
How Are Crypto Sandwich Attacks Carried Out?
The execution of a sandwich attack typically follows these steps:
Identify the target: Attackers monitor the public mempool for large or high-slippage trades that can be exploited.
Frontrunning: The attacker places an order to buy an asset just before the victim's transaction is processed. This causes the price of the asset to increase due to higher demand.
Victim's transaction: The victim's trade is executed at this inflated price, resulting in them receiving fewer tokens than expected.
Backrunning: After the victim’s transaction completes, the attacker sells the asset at the now higher price, securing a profit.
This method enables attackers to profit from even small price changes, making it a lucrative strategy when executed repeatedly.
What Is the Effect of Crypto Sandwich Attacks?
The consequences of sandwich attacks can be significant for individual traders. Victims often receive fewer tokens than anticipated, leading to financial losses. Widespread sandwich attacks distort market prices and lead to reduced trust in DEXs among traders. As traders become more cautious due to potential attacks, they may incur higher costs through increased slippage or fees associated with protective measures. Overall, sandwich attacks contribute to an environment where less experienced traders are at a disadvantage.
How Does a Sandwich Attack Work?
The mechanics behind sandwich attacks rely heavily on automated market makers (AMMs) used by DEXs. These platforms use liquidity pools to facilitate trading, and they adjust prices based on supply and demand dynamics.
Market manipulation: When an attacker frontruns a transaction, they effectively shift the liquidity pool balance, altering the expected execution price for subsequent trades.
Slippage: If a trader sets a high slippage tolerance to ensure their trade executes, they become more vulnerable to sandwich attacks. The greater the slippage tolerance, the larger the potential profit for attackers.
The simplicity and automation of these attacks make them particularly effective in environments where many traders are competing for favorable prices.
How to Detect And Prevent Sandwich Attacks
Detecting sandwich attacks can be challenging owing to their automated nature. There are, however, several ways traders protect themselves. Setting a lower slippage tolerance can reduce traders’ vulnerability as attackers often target trades with high tolerances. Some platforms enable users to submit transactions privately, making it harder for attackers to see and exploit pending trades and advanced users can analyze mempool activity for unusual patterns that may indicate potential sandwich attacks.
Trust Wallet offers built-in protections against miner extractable value (MEV) strategies, including sandwich attacks.
How Trust Wallet's MEV Protection Protects Users from Sandwich Attacks
Trust Wallet has implemented MEV protection features designed specifically to safeguard users from sandwich attacks and other forms of frontrunning. MEV protection works by ensuring that user transactions are not visible in the public mempool until they are confirmed on-chain. Obscuring transactions from bots that execute sandwich attacks, Trust Wallet helps ensure users receive fair market prices for their swaps. The MEV protection feature simplifies trading by reducing concerns about manipulation and slippage during transactions. Trust Wallet’s proactive approach aims to create a more secure trading environment for both novice and experienced crypto users.
Using Protection from MEV in Trust Wallet is simple. Here’s how:
Select ‘Swap’ in the bottom menu.
Choose the Setting button in the top right corner.
The MEV Protection feature is enabled by default on all the devices.
How to Swap Crypto Using Trust Wallet
You can swap crypto using Trust Wallet, via our trusted partners. In this example we have used Ethereum (ETH) and COMP. Here’s how:
Select “Swap” from the Trust Wallet home screen.
Ensure Ethereum is selected in the “From” network field, and choose ETH as your token
Ensure Ethereum is selected in the “To” network field, and choose COMP as your token.
Enter the amount of ETH you would like to swap.
Select “Continue” and complete the remaining steps.
Understanding sandwich attacks is important for anyone participating in DeFi. Be aware of how these attacks work and use protective measures, so you can better navigate the DeFi space and reduce your risk of falling victim to sandwich attacks.
Disclaimer: Content is for informational purposes and not investment advice. Web3 and crypto come with risk. Please do your own research with respect to interacting with any Web3 applications or crypto assets. View our terms of service.
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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.