Key Takeaways

• Sandwich attacks in crypto are a class of Maximal Extractable Value (MEV) exploits that cunningly sandwich transactions by placing orders just before and after a target transaction.

• Sandwich attacks are especially common in DeFi markets, leading to victims paying higher prices than normal when they buy digital assets.

• The scammers abuse the transparent nature of blockchain technology to scan and view pending transactions on the crypto mempool. 

• There are strategies for avoiding becoming the victim of a sandwich attack, such as using larger liquidity pools, setting a low slippage, using higher gas, and several others.

While they may not be as highly publicized as the more common crypto and DeFi scams like rug pull or flash loan attacks, sandwich attacks are still disruptive and hurt the cryptocurrency market. This article defines sandwich attacks, explains how they work, and offers tips on how to avoid them.

What are Sandwich Attacks in Crypto?

Sandwich attacks in crypto are market manipulation tricks in decentralized finance (DeFi) platforms and decentralized exchanges (DEXs). Also called front-running tricks are maximal extractable value (MEV) tactics in which attackers spot pending transactions on a blockchain and deliberately sandwich them by placing orders just before and after the target transaction. In addition to front-running, other prominent forms of MEV include back-running and transaction ordering manipulation.

Attackers exploit blockchains’ transparency feature to target DEXs and DeFi platforms, as they can see transactions in the mempool before they have been confirmed. While transparency is designed to be a significant feature in blockchain-based transactions, malicious traders abuse it to pry on large pending transactions they may want to attack.  

How Sandwich Attacks Unfold

In most cases, the attackers use bots to front-run transactions on a blockchain, mainly targeting large transactions. When the victim executes a transaction, the attacker uses a bot to buy a large order just before the transaction is completed, and by using higher gas fees, they ensure their own transaction is executed first. Because of the attacker’s action, the token’s price increases immediately for the victim, and then the attacker sells the token to the victim to make a profit from the transaction.

The sandwich attacker profited from the manipulated price that inflated the transaction, causing the victim to suffer substantial financial losses. Depending on the platform involved, sandwich attacks can target small and large transactions since the liquidity levels mainly influence them. During low liquidity, small front-run attacks can significantly impact the market, causing buyers’ transactions to execute at higher prices than initially anticipated. Conversely, sandwich attacks during higher liquidity consume more capital to manipulate the price and generate a profit.

Consequences of Sandwich Attacks

There are several problems associated with sandwich attacks, which include:

Loss of money: Individuals caught up in such attacks lose their money as they don’t get as much as they should if the playground had not been manipulated, therefore missing out on making profits.

Trust Issues: Decentralized Finance is a new concept in the world of finance, and when tricks like sandwich attacks occur, people lose trust in a good idea.

Rules Get Tougher: Some people may lose faith in the need to follow the rules when they realize others are making money through scams, making it harder for people to adopt DeFi.

How to Detect and Prevent Sandwich Attacks

The key to remaining safe is being able to detect sandwich attacks. This will mainly involve learning how to examine the blockchain for specific transaction patterns. You should be able to watch out for any significant transactions preceded and followed by relatively smaller ones. A prominent red flag should be any time you notice two small transactions, one just before and another soon after a reasonably large transaction, mainly within a short time frame.  

Such actions suggest the actions of a sandwich attacker trying to manipulate the market by placing their orders around significant transactions so they can profit from the price movement they set in motion. Nowadays, algorithms and advanced monitoring tools can be used to track such activities in real-time since they’re not easy to spot when you scan the blockchain manually. You can avoid sandwich attacks using the following actions:

How to Protect Yourself from Sandwich Attacks

You can use the following strategies to shield yourself from sandwich attacks:

Set a Low Slippage

In crypto trading, slippage refers to the difference between the anticipated and actual prices in a fast-moving market. When you set a low slippage, your transaction can only be executed when the crypto asset’s price stays within the selected range. Your order gets canceled automatically any time an attacker manipulates the price beyond your preset tolerance level.

Use a Larger Liquidity Pool

Choosing a larger liquidity pool when making a transaction is a good way to avoid sandwich attacks. Large liquidity pools provide stability that minimizes price fluctuations from a single trader. Any trader planning to attack a large liquidity pool would require a large amount of capital, thereby acting as a deterrent against this kind of manipulation.

Pay Higher Gas Fees

Using higher gas fees when making larger trades may cost you a little more but will speed up your transaction, making it more expensive for a sandwich attacker to front-run it. With the added layer of security, you should be able to safeguard your cryptocurrency.

Utilize Telegram Bots

Telegram features crypto bots that can automate and finalize trades fast, with some specifically designed to deal with sandwich attacks. These bots can potentially hide the details of your transactions until they are executed, thus preventing any malicious bots from running them. Nonetheless, you need to beware of some bots that could get access to your private keys and pose a security threat.

Use a Private RPC Network

A private Remote Procedure Call (RPC) can hide your pending transaction from any prying eye, preventing sandwich attackers from scanning a mempool for targets. RPCs add an extra layer of confidentiality to your crypto and DeFi trades.

Run Your Node

Running your node gives you more control over your transactions, thereby reducing your dependency on any external platform. This enables you to submit transactions directly and control the timing of your transactions.  

Install MEV Blocker

An MEV blocker is a free RPC endpoint that guards trades against MEV. The MEV blocker sends transactions to a network of searchers that can scan them for back-running to prevent anyone from front-running your trades. MEV blockers can be added to wallets that support them for an extra layer of protection.  

Flash Bots

You could also integrate Flash Bots to adaptable wallets to shield yourself from front-running by MEV bots as they prevent sandwich attacks.  

Conclusion

Sandwich attacks in DEXs and DeFi platforms are a stark reminder of the risks associated with doing business within the crypto space. By exploiting blockchain’s transparency feature, they lead to market imbalances, and victims end up spending more money than they should have. However, by learning how sandwich attackers work, you can take the right precautions to ensure you trade more securely and profitably.