Front Running Definition
Front running, in the context of blockchain and cryptocurrency, is the practice where someone profits from early access to market information. It typically occurs through illicit means, where an entity realizes that a large trade of cryptocurrency is about to take place and they place their own trade first, thereby inflating the price and reaping a big profit when the anticipated large trade occurs.
Front Running Key Points
- Front running is an unethical practice that largely relies on information asymmetry.
- It involves getting ahead of a large transaction to profit from anticipated price changes.
- In a blockchain context, this might involve scrutinizing pending transactions and swiftly placing one’s own trade beforehand.
- The decentralization and transparency of blockchain increase both, the potential for, and defenses against, front running.
What is Front Running?
Front running is a deceptive trading practice that capitalizes on advance, non-public knowledge about a substantial future transaction. The perpetrator, often a trader, positions their order ahead of this large trade to benefit from the subsequent price movements. In traditional finance, front running is both illegal and considered highly unethical.
Where does Front Running occur?
Front running can occur in any financial setting where influential transactions are anticipated but is particularly prevalent in cryptocurrency markets due to their nature. The unregulated, decentralized status of many of these markets provides opportunities for front running that would be illegal in traditional markets.
When does Front Running occur?
Generally, front running happens when a person, or an entity, comes across or deciphers information about a big pending transaction. Decentralized exchanges, where all transaction information is transparent and public, make it easier for potential scammers to spot and exploit this information.
Why is Front Running significant?
Front running is significant because it leads to market manipulation and affects the trade’s intended effect. Generally, it hampers the transparency and integrity of the financial markets. In the context of cryptocurrency and blockchain, it could also affect investor confidence and stymie the adoption of cryptocurrencies.
How does Front Running work?
In the context of blockchain, front running often involves a malicious entity or bot observing the network’s state and identifying a large pending transaction. Realizing that this transaction is likely to affect the price of a cryptocurrency, they make their transaction with a higher gas price. This ensures that miners include their transaction first in the blockchain and they can, therefore, profit from the consequent price change. Their ‘early’ transaction effectively ‘front runs’ the large pending transaction.
