Sandwich Attacks on DEXs: How Scammers Steal Your Crypto

Decentralized exchanges, or DEXs, are a popular way to trade crypto. But they have a hidden danger called a sandwich attack. These attacks are making people lose money when they trade.

What is a Sandwich Attack?

Imagine you want to buy a lot of a certain crypto on a DEX. You put in your order. A scammer, called a ‘searcher’, sees your order in the queue of pending transactions. They are watching the blockchain very closely.

Here is how the attack works:

1. Front Running: The scammer quickly places their own buy order for the same crypto before your order. Because they are faster, their order gets processed first. This makes the price of the crypto go up a little bit.
2. Your Order: Your buy order then gets processed. Since the price went up, you pay more than you expected.
3. Back Running: After your order is done, the scammer immediately places a sell order for the same crypto they just bought. Because you just bought a lot, driving the price up, they can now sell at a higher price and make a profit.

The scammer essentially puts your trade between their two trades, like a sandwich. They profit from the price change they caused. This is bad for you because you get a worse price for your trade.

Why is this Happening on DEXs?

DEXs like Uniswap or PancakeSwap work by using automated market makers (AMMs). These systems use liquidity pools to let people trade without a central party. Transactions are public on the blockchain and processed in the order they are received. This transparency, while good for many reasons, also allows these attacks to happen.

The speed of transactions is also important. Some blockchains are faster than others. This allows attackers to get their malicious trades in quickly. While solutions like Ethereum’s Layer 2 solutions are helping to speed things up and lower costs, sandwich attacks are still a problem.

How to Protect Yourself

It can be hard to completely avoid sandwich attacks, but there are steps you can take:

• Use DEX Aggregators: These tools scan multiple DEXs to find the best price for your trade. Sometimes they can find a path that avoids these attacks or splits your trade across different pools to minimize the impact.
• Set Higher Slippage Tolerance (Carefully): Slippage tolerance is the maximum price change you are willing to accept for a trade. If you set it very high, the attacker might still be able to sandwich you profitably. If you set it too low, your trade might fail. It’s a balance.
• Trade During Off Peak Hours: When trading volume is lower, there might be fewer attackers or less liquidity for them to exploit.
• Use Privacy Features (if available): Some newer DEXs or specific services are exploring ways to hide your transaction details until they are executed, making it harder for attackers to see your trade coming. Projects focused on privacy are important to watch in this space.
• Be Aware of Transaction Fees: Sometimes, paying a slightly higher transaction fee can help your transaction get processed faster, potentially ahead of an attacker. However, this is not always effective.

Sandwich attacks are a real threat on DEXs. By understanding how they work and using the right tools and strategies, you can better protect your crypto trades.