Encryption-based Execution Eliminates Crypto Traders' Susceptibility to Premature Trading
Crypto Trading Front-Runners: A Pesky Problem Solved?
Front-running, a sneaky tactic in crypto trading, is causing quite the stir as more traders fall victim. To understand it better, picture this: a trader spots a large buy order about to be executed. They quickly place their own buy order before it, causing the price to inch up slightly. Once the big order fills at the inflated price, the front-runner cashes out for a quick profit, leaving the original trader holding the bag with a less favorable execution price.
But what can be done about it? Let's delve deeper to see exactly how front-running impacts everyday traders, why it's a thorn in the side of both TradFi and Web3 markets, and what steps can be taken to combat and, dare we say, eradicate front-running once and for all. We'll take a look at specific encryption protocols and architectures, such as Enclave's Fully Encrypted Exchange (FEX).
Crypto Trading Front-Runners: A Puzzle to Solve
So, what's the deal with front-running? It's not your everyday scam, and it takes various shapes even within TradFi and Web3 worlds. In TradFi, the simplest form of front-running occurs when a broker takes in orders from its customers and cheats by placing its own trades before it processes customer orders. The profits are grabbed from pending trades.
In the fast-paced world of high volume trading using automated algorithms, front-running can occur even quicker. Whether it's a broker or an exchange, by setting up intricate algorithms that take advantage of pending trades as data inputs, they can make easy money off this insider knowledge. This activity is, by default, a type of insider trading and is illegally unethical.
Things get trickier in the Web3 realm. Exchanges, even those in DEX models, can allow for front-running if they choose to exploit their customers' trust. However, node providers can potentially front-run if they have fast enough algorithms, allowing them to see pending transactions that haven't been verified yet. They can jump in front of these trades and run off with the profits.
Ethereum-based bots offer a Web3-specific front-running strategy, viewing pending trades and offering a higher gas fee for their own trade, jumping the queue and capitalizing on the information they've gathered on pending transactions. The fact that this activity can be coded into bots and algorithms means they can take advantage of information that is exchanged in mere fractions of a second. This slight advantage may not seem like much, but for front-runners, it adds up to substantial gains at the expense of their victims.
Easy Fix, Complex Implementation
The solution to the front-running issue seems evident: don't let anyone (or bots) view pending trades! If brokers, exchanges, nodes, and bots can't see pending transactions, they can't exploit them.
The challenge, of course, is equally clear: if no one can see the pending transactions, how will they be processed? This issue highlights the problem till now: if a system temporarily encrypts information during the process but fails to encrypt it all the way through, then it's not adequately protected, is it?
Thankfully, progress is being made in encrypted execution platforms. Enclave is currently leading the charge with its evolutions of this "fully encrypted exchange," which processes transactions privately without the need for brokers, exchanges, nodes, or intermediaries. EnclaveX is the latest version featuring secure enclave technology.
Such a platform ensures that all pending transactions remain hidden from front-runners. While this type of service has been created primarily for high-volume professional traders, the potential to provide it to all users could protect both high- and low-volume traders, not just from front-running but also from identifying fast-moving trends that might impact the market.
Protecting both professional and casual traders alike ensures that front-runners can't spoil natural market movements.
Does this solution work for TradFi? Probably not. TradFi has a tendency to drag its feet when it comes to adopting advanced technologies, and particularly those favoring a more decentralized, trustless operating environment.
Web3, on the other hand, revels in innovation and the development of cutting-edge technologies, like fully encrypted exchanges. The entire business model focuses on the volume and success of its members, rather than setting up gatekeepers that might be present in TradFi. This is where Web3 truly shines, and will continue to do so.
The Future: Front-Runners on the Run
Thanks to technological advancements, particularly in encryption architecture, the capabilities of front-runners are becoming increasingly limited and will eventually be restricted to the shadier corners of the exchanges. For high-quality exchanges, the ability to encrypt trading throughout the entire process is imperative to not only prevent front-running but to establish confidence in the process and the market.
After all, markets have emotions and react based on fear, doubt, and suspicion as much as they do on encouragement, hope, and trust. Ensuring that every trade is executed fairly and is secure is a crucial step in the right direction.
Also Read: Top 5 Free DeFi Tools to Transform Your Crypto Trading Game
- Interestingly, front-running is not exclusive to traditional finance (TradFi) but also occurs in the Web3 ecosystem, causing concerns for both markets.
- In the Web3 realm, Ethereum-based bots have developed a strategy to front-run by viewing pending trades and offering higher gas fees, thereby jumping the queue and capitalizing on the information gathered.
- Enclave's Fully Encrypted Exchange (FEX) is at the forefront of solving the front-running issue by ensuring all pending transactions remain hidden from front-runners, potentially protecting both high- and low-volume traders.
- As Web3 embraces innovation and the development of cutting-edge technologies, the implementation of fully encrypted exchanges could significantly limit the capabilities of front-runners, ensuring a fair and secure market.
- By eradicating front-running and ensuring secure, encrypted trading, markets can foster a climate of trust, encouraging more interested parties to invest in finance and technology.
