How Do “Sandwich Attacks” Exploit the Price Changes Caused by Large Trades in an AMM?
A sandwich attack involves a malicious actor detecting a large pending trade in the mempool. The attacker executes a small buy order just before the large trade (the "front-run"), driving up the price.
The large trade then executes at the higher, front-run price, incurring more slippage. Immediately after, the attacker executes a sell order (the "back-run") at the newly inflated price.
The attacker profits from the price movement caused by the victim's trade, and the victim pays a higher execution price.
Glossar
Large Trades
Execution ⎊ Large trades, within cryptocurrency and derivatives markets, represent order flow significantly impacting short-term liquidity and price discovery, often originating from institutional investors or high-frequency trading firms.
Sandwich Attack
Exploitation ⎊ The Sandwich Attack, within cryptocurrency derivatives and options trading, represents a manipulative trading strategy leveraging order book dynamics to artificially inflate or deflate an asset's price.
Price Changes
Dynamic ⎊ Price Changes represent the continuous fluctuation in the market value of a cryptocurrency or its derivative contracts, driven by the dynamic interplay of supply, demand, and market sentiment.
Exploit
Vulnerability ⎊ Within cryptocurrency, options trading, and financial derivatives, a vulnerability represents a systemic weakness in a protocol, smart contract, or trading infrastructure that can be leveraged to gain an unfair advantage or inflict financial harm.