Sandwich Trading Definition
Sandwich trading refers to a trading strategy used primarily in the world of cryptocurrency and decentralized finance (DeFi). It involves a manipulative practice where a trader places a transaction in between two others in an attempt to benefit from the price differences and achieve potential revenue from the price movement. The technique involves a trader, also known as a sandwich attacker, exploiting the design mechanism of DeFi applications that execute trades in batches instead of sequentially.
Sandwich Trading Key Points
- Sandwich trading is a form of cryptocurrency trading manipulation.
- A sandwich attacker will place a buy order, let others push the price up, then sell their assets to secure profit.
- This technique occurs mainly in DeFi applications due to their design mechanism.
What is Sandwich Trading?
Sandwich trading is a trading strategy with an unscrupulous edge. In this method, a trader or a bot places an order and then waits for other unsuspecting traders to place their transactions. These innocent traders essentially end up incidentally driving the asset’s price upward. This price surge allows the sandwich attacker to sell the assets at a profit, often leaving the other traders at a loss.
Why is Sandwich Trading Used?
This type of trading is used primarily due to the design of DeFi applications. Unlike traditional investment platforms, DeFi applications don’t require an intermediary like a bank or broker. While this decentralization fosters many opportunities, it also opens doors for manipulation through tactics like sandwich trading. By exploiting the design mechanism of DeFi applications that execute trades in batches, a trader can gain an unfair advantage.
Where is Sandwich Trading Used?
Sandwich trading is predominantly seen in DeFi platforms, cryptocurrency exchanges, and blockchain-enabled trading apps. These platforms often rely on automated and decentralized networks, making them perfect targets for sandwich trading. The openness and pseudo-anonymity associated with blockchain technology further add to the issue as sandwich traders can operate discreetly.
When is Sandwich Trading Used?
Sandwich trading is almost always used in high-frequency trading scenarios, where algorithms and bots are extensively employed to trade assets in seconds. Such trading situations provide the ideal environment for a sandwich attacker to exploit price movements and quickly sweep in and out of positions.
How is Sandwich Trading Done?
A sandwich trader purposely places an order knowing that other orders are about to be executed. They wait for other traders to push up the price before selling the assets at a higher price. When the innocent traders’ orders are executed, the attacker swoops back in to buy the assets back at the original or lower price. This rounds off the sandwich trading attack, allowing the attacker to profit at the expense of other traders.
