High-Frequency Trading on Decentralized On-Chain Exchanges

Decentralized exchanges (DEXs) allow parties to participate in financial markets while retaining full custody of their funds. However, the transparency of blockchain-based DEX in combination with the latency for transactions to be processed, makes market-manipulation feasible. For instance, adversaries could perform front-running–the practice of exploiting (typically non-public) information that may change the price of an asset for financial gain. In this talk we formalize, analytically exposit and empirically evaluate an augmented variant of front-running: sandwich attacks, which involve front-and back-running victim transactions on a blockchain-based DEX. We quantify the probability of an adversarial trader being able to undertake the attack, based on the relative positioning of a transaction within a blockchain block. We find that a single adversarial trader can earn a daily revenue of over several thousand USD when performing sandwich attacks on one particular DEX–Uniswap, an exchange with over 5M USD daily trading volume by June 2020. In addition to a single-adversary game, we simulate the outcome of sandwich attacks under multiple competing adversaries, to account for the real-world trading environment.

(This talk is based on a paper at IEEE Symposium on Security & Privacy (S&P) 2021. The preprint is available: https://arxiv.org/pdf/2009.14021.pdf.)