Sandwich Attacks in Crypto: A Detailed and Technical Guide

As the cryptocurrency market continues to evolve, so do the methods that malicious actors use to exploit it. Sandwich attacks have emerged as one such method, primarily affecting users of decentralized exchanges (DEXs). This article provides a detailed and technical guide on what these attacks are and how to avoid falling victim to them.

Understanding Sandwich Attacks

Sandwich attacks are a type of front-running attack that occur on DEXs. Named after the method in which the malicious transaction "sandwiches" the victim's transaction, this exploit relies on the nature of DEXs and the transparency of the blockchain.

A sandwich attack works as follows:

1. A malicious bot identifies a significant trade about to happen on a DEX, thanks to the public mempool where all transactions wait to be confirmed.
2. The bot places a transaction with a higher gas fee, ensuring it gets processed first, buying up the token being traded by the victim.
3. This initial purchase increases the token's price due to the liquidity pool's automated price calculation.
4. The victim's transaction is then processed at this higher price.
5. Immediately after, the bot sells the tokens it initially purchased, returning the price to its normal level and making a profit from the price difference at the victim's expense.

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Preventing Sandwich Attacks

Preventing sandwich attacks primarily revolves around understanding the risks associated with DEXs and mitigating them. Here are a few strategies:

1. Slippage Tolerance Setting: DEXs allow you to set your slippage tolerance, which is the amount of price movement you're willing to accept. Setting a lower slippage tolerance can prevent sandwich attacks but might result in failed transactions due to normal price fluctuations.
2. Gas Price Setting: By setting a higher gas price for your transaction, you can avoid having it stuck in the mempool, making it less visible to malicious bots. However, this increases the cost of transactions.
3. Trade Size: Larger trades are often the target of sandwich attacks because they can significantly impact the price. Splitting large transactions into smaller ones can help avoid attracting attention.
4. DEX Choices: Some DEXs have implemented measures to prevent sandwich attacks, so choosing the right platform can be crucial.

In conclusion, while sandwich attacks present a risk for DEX users, awareness and protective measures can mitigate these risks. As always in the crypto world, staying informed and understanding the mechanics behind your transactions is essential.