High-Frequency Trading on Decentralized On-Chain Exchanges

TL;DR

This paper analyzes the vulnerability of decentralized on-chain exchanges to high-frequency sandwich attacks, quantifies their profitability, and evaluates the impact of multiple adversaries in such trading environments.

Contribution

It formalizes, analyzes, and empirically evaluates sandwich attacks on DEXs, providing insights into their profitability and competitive dynamics.

Findings

A single adversary can earn over several thousand USD daily.

Sandwich attacks are highly probable based on transaction positioning within blocks.

Multiple adversaries' interactions influence attack success and profitability.

Abstract

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 work 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.