The global cryptocurrency juggernaut is on roll – attracting millions in India too. A recent report by Chainalysis ranked India second in cryptocurrency adoption. But while India is witnessing a boom in cryptocurrency trade and usage, the danger of going further cannot be discounted. Frontrunning, simply put, is trading cryptocurrencies based on publicly unavailable information about future transactions. According to a CyberNews report, the statement may sound innocuous, but going forward, traders around the world lost $280 million every month.
Eliasgar Merchant, developer relations engineer at Tendermint, explains, “I like to compare front running to insider trading in the financial markets. In front running, traders use non-public information, such as when a transaction is confirmed. To maximize profits before pending transactions.”
Raj Kapoor, a global blockchain expert based out of Mumbai, listed several factors that contributed to the move: “Information asymmetry, where ordinary traders have no internal information, but miners have prior knowledge of future transactions.” Information plays a major role in moving forward. There is always some time delay in completing a transaction in a blockchain. Miners sometimes take advantage of time lag to book transactions and gain unfair advantage. Huh”.
In a Medium blog, Mr. Merchant noted how block makers (called ledgers) wait for information from exchanges in the mempool and try to broadcast their own exchanges to traders. Mempool is a place that holds data on all unconfirmed crypto transactions. He also notes two potential front-line attackers. Mr. Merchant writes, miners are in the best position to attack because they are the ones who create the blocks in a transaction, while “full nodes” – users monitoring transactions – can push pending transactions, citing high gas fees. Huh.
For non-starters, the gas fee is a fee paid for successfully conducting a blockchain transaction. The higher the gas fee, the higher the chances of a successful transaction.
Mr Kapoor, the founder of the India Blockchain Alliance, also blames factual factors such as network issues and personal biases for the massive advance in the cryptocurrency space. “Someone with a better network can break the queue and place their order ahead of everyone else. Sometimes, even miners with personal bias can block transactions,” he shares.
Apart from the obvious monetary loss, going forward could also break the confidence of many existing and potential investors. To fight going forward, several blockchain platforms have devised ways to mitigate this.
Recently, blockchain platform Telos announced the launch of the EVM mainnet, which aims to reduce not only front-running, but also high gas fees and slow transaction speeds. “The Telos EVM is faster, better and cheaper. The simplicity of integration with MetaMask (a cryptocurrency wallet) allows investors to trade securely,” said Douglas Horn, chief architect of Telos.
“Telos is using hierarchy to execute transactions. This means that they prioritize the execution of orders when they come in. This is a good approach and can prevent further escalation to an extent,” Mr. Merchant believes. Mr. Kapoor prefers a more wait-and-watch approach to a viable solution. “Some are, but haven’t actually been tested. Telos EVMs sounds like a good idea, but we need to see how it pans out in real scenarios.”
While Telos, according to Mr. Merchant, uses “hierarchy” to execute orders, there are other alleged ways to fight further. Gas fee limited, where the gas fee is limited to less than or equal to the maximum gas fee defined by the smart contract owner, and off-chain ordering where orders are placed on traditional systems and settled on the blockchain.
Given that decentralization is considered the biggest USP of blockchain, could a regulatory body like SEBI or SEC be the ultimate solution against going forward? Mr. Kapoor believes that the establishment of a regulatory authority would be the end of the crypto sector. This would defeat the concept of decentralization. “The solution will come from within the blockchain community. It is all within the family,” he adds.