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Understanding Front-Running and more

Introduction​

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.

Conclusion​

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.