Understanding Front-Running and more
Blockchain technology is vulnerable to practices that can affect the fairness and security of the network. Two such practices are front-running and Maximal Extractable Value (MEV), which are important for blockchain participants to understand.
What is Front-Running?
Front-running is when someone, such as a validator, uses their ability to see pending transactions to execute their own transactions first, benefiting from the knowledge of upcoming transactions. In nameservice auctions, a front-runner might place a higher bid before the original bid is confirmed, unfairly winning the auction.
Nameservices and Nameservice Auctions
Nameservices are human-readable identifiers on a blockchain, akin to internet domain names, that correspond to specific addresses or resources. They simplify interactions with typically long and complex blockchain addresses, allowing users to have a memorable and unique identifier for their blockchain address or smart contract.
Nameservice auctions are the process by which these identifiers are bid on and acquired. To combat front-running—where someone might use knowledge of pending bids to place a higher bid first—mechanisms such as commit-reveal schemes, auction extensions, and fair sequencing are implemented. These strategies ensure a transparent and fair bidding process, reducing the potential for Maximal Extractable Value (MEV) exploitation.
What is Maximal Extractable Value (MEV)?
MEV is the highest value that can be extracted by manipulating the order of transactions within a block, beyond the standard block rewards and fees. This has become more prominent with the growth of decentralised finance (DeFi), where transaction order can greatly affect profits.
Implications of MEV
MEV can lead to:
- Network Security: Potential centralisation, as those with more computational power might dominate the process, increasing the risk of attacks.
- Market Fairness: An uneven playing field where only a few can gain at the expense of the majority.
- User Experience: Higher fees and network congestion due to the competition for MEV.
Mitigating MEV and Front-Running
Some solutions being developed to mitigate MEV and front-running, including:
- Time-delayed Transactions: Random delays to make transaction timing unpredictable.
- Private Transaction Pools: Concealing transactions until they are mined.
- Fair Sequencing Services: Processing transactions in the order they are received.
For this tutorial, we will be exploring the last solution, fair sequencing services, in the context of nameservice auctions.
MEV and front-running are challenges to blockchain integrity and fairness. Ongoing innovation and implementation of mitigation strategies are crucial for the ecosystem's health and success.