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Sandwich Trading

Intermediate
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What Is Sandwich Trading?

Sandwich trading, also referred to as sandwich attacks, is a trading manipulation technique prevalent in cryptocurrency markets. This tactic exploits the price movements of tokens driven by transactions on decentralized exchanges (DEXs) to generate profits at the expense of unsuspecting traders.

How Sandwich Trading Works

In sandwich trading, the mechanics involve decentralized exchange (DEX) trades being sent to a mempool before execution, where pending transactions become visible. A sandwich attacker strategically places one transaction before (front-running) and one after (back-running) a target trade in order to effectively manipulate token prices. For example, when Trader A submits a transaction with a specified slippage tolerance, the attacker places a front order to buy tokens, leading to an inflation in price. Subsequently, Trader A's transaction takes place at the elevated price, followed by the attacker’s back order to sell tokens at the inflated price, allowing the attacker to profit from the price difference.

Impact of Sandwich Trading

Market Manipulation: Exploits price discrepancies, eroding market trust.

Financial Losses: Victims suffer losses as a result of manipulated prices.

Reduced Liquidity: Repeated attacks dissuade liquidity providers, leading to decreased market liquidity.

Protection Against Sandwich Attacks

Use Limit Orders: Specify the exact price for buying or selling assets.

Low Slippage: Keep slippage tolerance low to minimize potential manipulation.

Break Large Trades: Divide extensive trades into smaller ones to lessen the impact of the attack.

DEX Mitigation Strategies

Anti-Front Running Measures: Implement order execution delays and randomization.

Transaction Analysis Tools: Utilize tools to identify suspicious trading patterns.

Algorithmic Trading Policies: Establish clear guidelines for trading bots and high-frequency trading.

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