Front Running Meaning

What Is Front Running?

In conventional markets, front running is the illegal practice that involves a broker exploiting early access (or insider information) to impending trade orders. Such practice allows the broker to execute their own trades ahead of the existing ones. This dishonest behavior gives the front-runners an unfair edge over other market participants, allowing them to capitalize on anticipated market shifts. 

In the blockchain context, network participants known as validators or miners can access mempools. A mempool is simply the temporary waiting area or queue for pending or unconfirmed transactions. And since the validators are responsible for verifying and confirming them, they can reorganize, omit, or include the transactions based on the incentive. Front-running occurs when the miners or validators use their knowledge of the mempool to place their own transactions based on the pending transactions.

For example, assume that Jane places a genuine large buy order for a particular cryptocurrency. The transaction is sent to the network nodes’ mempools, making it visible to other market participants. This advanced knowledge allows these participants to quickly insert and confirm their buy orders for the same crypto before Jane’s order is executed. Furthermore, automated trading bots often execute front-running attacks by offering higher gas fees than the original trade. By paying higher fees, the validators are incentivized to process these transactions ahead of the pending transactions. The traders benefit from the arbitrage. 

This form of attack is also common in NFT marketplaces, where the trader with insider information purchases an NFT before it launches. The trader sells the NFT once publicly available, gaining from the price increase.