The global cryptocurrency juggernaut rolls on with millions of thousands of investors in India too. A recent Chainalysis report has rated India as the second place in the cryptocurrency adoption space. However, while India has witnessed a surge in cryptocurrency trading and usage, the threat of frontrunning cannot be discounted. Frontrunning, simply put, is trading of cryptos based on publically unavailable information about a future transaction. Although the statement may sound innocuous, frontrunning has caused worldwide a loss of $280 million to unsuspecting traders each month, Cybernews reports.
I like to compare insider trading to front running in financial markets. In frontrunning, traders use non-public information like pending transactions to maximise profits before a transaction can be confirmed, explains Aliasgar Merchant, Developer Relations Engineer, Tendermint.
Raj Kapoor, a global blockchain expert based out of Mumbai, lists several factors that contribute to frontrunning: Information asymmetry, where common traders have no inside information but miners have prior information about future transactions, play a major role in frontrunning. There is always some delay in completing a transaction in blockchain. Miners sometimes exploit the time lag to make a transaction and earn undue profits In a Medium blog, Mr Merchant notes how blocked producers called leaders wait for information on exchanges in the mempool and try to broadcast their own exchanges before traders. Mempool is a place which keeps the info for all the unconfirmed crypto transactions. He also notes two possible frontrunning attackers. Miners, writes Mr Merchant, are in the best position to attack since they are the ones building blocks in transactions while full nodes - users monitoring transactions - can front-run pending transactions by quoting higher gas fee.
The gas fee is the charge credited to conduct a successful blockchain transaction for the uninitiated Higher the gas fee, higher the chances of a successful transaction.
However, Mr M. Rohan Kapoor, the Founder of India Blockchain Alliance, also blames seemingly inconvenient, but factual factors such as network issues and personal prejudices for the rampant frontrunners in the cryptocurrency space. Someone with a better network can break the queue and place his order ahead of everyone. Sometimes, miners can also share personal prejudices that block the transactions too, which he blocks.
Apart from the obvious monetary loss, frontrunning can also break the trust of many existing and potential investors. To mitigate frontrunning, several blockchain platforms have devised measures to help fight it.
Recently, the blockchain platform Telos announced the launch of EVM Mainnet, which aims not only to mitigate frontrunning but also high gas fee and slow transaction speeds. Noting that frontrunning has turned depressing and complex, Douglas Horn, Telos chief architect, says, Telos EVM is faster, better and cheaper. The simplicity of integrating Metamask, a Bitcoin wallet, allows an investor to trade safely. Telos uses hierarchy to execute transactions. This means they give execution of orders priority on the basis of when they arrive. It is a good approach and can prevent frontrunning to an extent, concludes Mr Merchant. Mr. Kapoor prefers a more buy and demand approach for a viable solution. There are a few, but not really tested. Telos EVM sounds like a good idea, but we need to see how it pans out in real scenarios. While Telos, according to Mr Merchant, uses the hierarchy to execute orders, there are other reported ways to fight frontrunning. Gas fees are limiting, where the gas fee is defined to be less than or equal to the maximum gas fee by the owner of smart contract, and off-chain ordering where the ordering is done on a traditional system and settlement is done on blockchain.
What are the most important USPs of blockchain? Can an open-source regulating body like SEBI or SEC determine its ability to curb frontrunning? The owner of a regulatory authority, Mr. Kapoor, says the end of crypto industry will be the establishment of an autorité deregulation. This will crush the concept of decentralisation. The solution will come from within the blockchain community. It is all within the family, he adds.