The respective nations regulate the trading behavior in the world financial markets to maintain fair business practices. The Securities Exchange Board of respective governments have also passed several laws to maintain their relevance and enforcement. The prohibition enforcement of Crypto NFT Front-Running is a constituent of such laws to prevent frauds, money laundering, etc.
What is Crypto NFT Front-Running?
The term Front-Running Trading is a phrase used in the stock market. It is coined to describe the activity of using insider information to initiate trades. Usually, it is performed to enter the market earlier than the competition to grab cheaper deals to reap higher gains.
Front-Running is no longer limited to Stock Market trading because it’s also been witnessed within the DeFi Crypto space. The bad actors participating in it are aware of NFT Marketplace insider dealings, on which NFTs will feature maximum traction.
Based on such information, such potential NFTs are purchased before being featured, raising their prices immediately, on which the insider makes a profit.
Real Example of NFT Front-Running in the Crypto Market!
Nate Chastain – OpenSea’s Head of Product, was discovered to have purchased NFTs before being featured on the same platform. Reportedly, he later sold those NFTs for a profit. Although it happened in December of 2021, the global crypto community and the platform authorities frowned upon such activity.
Crypto NFT Front-Running Bots are Destroying the Market!
In the technologically advancing world of Web3, the activity of Front-Running Trading doesn’t always require bad actors. Early discovery by a popular NFT marketplace detected the presence of Front-running bots, who performed numerous unlawful actions.
At the core level, such bots are responsible for scanning the pending transactions on the blockchain, then paying a significant gas fee. Its outcome leads to miners performing the specific transaction first to front-run a colossal trade that ultimately affects the market pricing.
In this manner, the Front-Running bots are responsible for raising the Gas Fee and escalating the crypto asset cost.
Crypto NFT Wash Trading vs Crypto NFT Front-Running
Another illegal act that haunts the crypto space is Wash Trading, and you can learn more about it here. But, since both activities involve inflating the price of the specific asset, is wash trading similar to Front-Running Trading?
No. Although both the activities entail having a similar influence on the asset value, here’s how they both differ primarily:
- Wash Trading involves an investor purchasing and selling the same asset to artificially inflate its security value.
- The Front-Running attack involves a malicious user discovering a swap transaction after it’s broadcasted but before it’s finalized to reorder the transaction for their benefit.
The NFT market is more susceptible to Wash trading because specific platforms allow selling NFTs to unverified users. Such a window allows a singular user to link multiple wallets to trade or move assets between them. Doing such transactions in repetition will naturally inflate the asset’s value in the market.
Events like sandwich attacks focus on exploiting DeFi protocols and services for front-running. A sandwich attack is when two orders are placed before and after the trade, de-prioritizing the transaction in the middle. Here, the investor front runs and back-run simultaneously.
The outcome is that it increases the slippage of value yet boosts the price of the asset for the victim trader. Unavoidably due to seemingly high purchase volume and rise in the price, the asset is then re-sold by the investor for a profit.
How to Detect Crypto NFT Front-Running?
One sure way to detect such activities is by monitoring the trade data of a user’s wallet addresses, purchases & sales of NFTs, & fund transfers.
The three points herein to detect front-running activity is to notice the following:
- Acquisition or Selling of a financial instrument
- A Legitimate Transaction
- A Potential unwinding of the financial instrument to close the cycle
Another manner for detecting front-running is to verify the buy/sell orders nearer to an NFT artist’s buy/sell order with the same instrument that first impacted the NFT price.
The compliance team could also perform trade reconstruction and connect unstructured data to trades for offering contexts like genuine dialogues with buyers.
Several methods can be employed to prevent and prohibit Crypto NFT Front-Running activities, including running anti-front-running measures. They involve making transactions private and using a hidden mempool, besides keeping the adjustment slippage minimal.
Still, detecting Front-Running Trading in the crypto space is time-consuming and complex, but several web3 projects are already working on minimizing such occurrences.
Such activities aren’t considered illegal in the crypto space because insider information can be accessed since the digital ledgers are publically accessible. However, their existence can make investors incur losses by paying higher gas fees or owning overpriced assets.
A private transaction service like SparkPool’s TaiChi network can prevent bots from accessing or reading transactions on mempool. Alternatively, KeeperDAO uses a secret Hiding Book mempool, to allow users receive a portion of the profits in ROOK tokens where Miner-extracted values are also accepted in the ROOK treasury.