Sandwich attacks are emerging as a prevalent form of cyber exploitation in the DeFi sector. It is essential to understand their fundamentals. This Tokenhell guide aims to explore sandwich attacks in-depth, including their mechanisms and defense strategies.
With the rise in popularity comes an increased risk of attracting manipulators with self-serving motives. Similarly, as the DeFi sector expands and gains broader acceptance, it becomes more susceptible to cyber-attacks.
Sandwich attacks are among the notable threats in this industry, presenting significant risks to cryptocurrency investors and their holdings. This analysis delves into the intricacies of this type of exploitation, examining its principles, operational methods, and preventative measures.
Understanding Sandwich Attacks
A sandwich attack represents a form of digital interference that involves price manipulation of a specific asset. Predominantly targeting decentralized protocols and services, these attacks are malicious acts in which the attacker executes two transactions, one before and another after the victim’s transaction.
Consider this scenario for clarity: An individual intends to exchange a certain cryptocurrency (X) for another (Y) in a substantial transaction. An opportunistic trader employs a covert bot to detect and exploit this trade, purchasing cryptocurrency Y before the larger transaction is finalized.
This action elevates the cost for the original trader as the price of Y increases, thereby incurring higher expenses. The opportunistic bot then profits by selling cryptocurrency Y at this elevated price. Such attacks are prevalent due to the public nature of blockchains, where transaction visibility in the pool is open to all, barring those directly linked to a mining pool.
Moreover, smart contracts often possess open functions executing trades, such as claiming LP reward tokens and exchanging them for another token via a decentralized exchange (DEX).
Scenarios of Sandwich Attacks
Observations indicate that perpetrators of sandwich attacks adopt specific strategies. Below are scenarios in which such attacks can occur.
Liquidity Taker vs. Taker Scenario
In this situation, various liquidity takers may target one another. Picture a typical market taker with a transaction awaiting approval on the blockchain. To generate profit, an attacker capitalizes on this by dispatching additional front-running and back-running transactions.
Miners then determine which transaction to process first. The attacker’s transaction is more likely to be prioritized if they pay a higher transaction fee. While success is uncertain, this illustrates the ease with which a sandwich attack can be initiated.
Liquidity Provider vs. Taker Scenario
A liquidity provider may target a liquidity taker following a similar approach. The initial steps remain consistent, but the attacker must execute three specific actions:
- They withdraw liquidity, thereby increasing the victim’s slippage.
- They subsequently re-add liquidity to rebalance the original pool.
- They exchange asset Y for X, reverting the asset balance to its state before the attack.
By withdrawing liquidity before the victim’s transaction, the attacker forgoes the commission fee usually incurred by such transactions. While this results in financial detriment to the taker, the attacker relinquishes their commission, typically a small fee earned from pool activities.
Case Studies of Sandwich Attacks in the Cryptocurrency Realm
Historical instances in the cryptocurrency sector have documented significant sandwich attack incidents. An Ethereum (ETH) validator illicitly acquired over $25 million in digital assets by exploiting an Ethereum MEV bot involved in sandwich trading activities. The illicit gains were divided among three principal wallets:
The largest portion, exceeding $20 million, was transferred to the address 0x3c98.
A secondary amount, approximately $2.3 million, was allocated to the address 0x5b04.
An additional sum of nearly $3 million was sent to the address 0x27bf.
Initially famous for its meme-based background, the PEPE token faced similar sandwich attacks and front-running challenges. In its early stages, with modest liquidity and recognition, the PEPE token suddenly became popular following a tweet that claimed a PEPE bag purchased for $250 had escalated in value to $1.5 million.
This tweet sparked a surge in interest and value for the PEPE token. Subsequently, an entity employed a sandwich attack bot to preemptively engage in PEPE token purchases, artificially inflating the token’s price. This entity also manipulated the prices of the CHAD token using similar tactics, accruing more than $1.28 million in transaction fees in just a day. The perpetrator netted profits exceeding $1.4 million, detrimentally impacting traders who bought the tokens at these inflated prices.
Recognizing a Sandwich Attack
Discerning a sandwich attack necessitates vigilance in several areas:
- Be alert to any rapid price fluctuations of the asset you intend to trade. These attacks often result in immediate price changes that can be a warning sign.
- Monitor for unusual slippage rates, indicating a potential sandwich attack. A discrepancy between the expected and executed transaction prices is often telling.
- Pay attention to unexpected delays in transactions. Sandwich attacks can disrupt the normal flow of transactions, causing delays that could signify foul play.
To defend against such attacks, traders should:
- Strategically time their transactions, steering clear of peak periods and volatile market conditions.
- Utilize monitoring tools to detect any unforeseen deviations in their trading plans.
- Meticulously review all transaction details, including fees, rates, and amounts.
- Maintain security on crypto platforms and avoid using unsecured networks.
- Opt for liquidity pools that prevent manipulative strategies involving elevated transaction fees.
Final Thoughts
The rising occurrence of sandwich attacks underscores the growing security challenges within the decentralized finance (DeFi) sector. It highlights the necessity for implementing effective strategies to mitigate these sophisticated forms of exploitation.
Though further analysis and response strategies are pending, DeFi users should familiarize themselves with the nature of these attacks, remain vigilant, and adopt the recommended preventive measures to safeguard against falling victim to these schemes.
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