Can Ethereum’s “Front Running Bots” Cause New Crypto Crash?

Apparently, the Matrix is upon us. It is everywhere, all around you. Even as we speak, the world of front running bots is roving the dark forest of Ethereum to make trades before you even think about them.

Anticipatory moves are the new rage in Silicon Valley. Their AI is now thinking of ways to anticipate what users will do next. It was Amazon who first thought of anticipatory shipping when they patented a method, which hasn’t been implemented yet, that would allow them to start packing an item before you bought it.

Explained in the excellent book Re-engineering humanity, author Evan Selinger explained:

It’s become clichéd to say that the future is already here but not evenly distributed, but Amazon proved that this is so back in 2014. That’s when the company drew headlines for acquiring a patent for “anticipatory” shipping. This is exactly what it sounds like – a patent for a system that can predict what customers want to buy before they even know they want to make the purchases.

Yes, this is what Silicon Valley is thinking right now. To ship products it expects customers to buy pre-emptively, based on previous searches and purchases, wish lists, and how long the user’s cursor hovers over an item online.

Dark forest

A similar fate could now await traders in the cryptosphere as front running bots seem to rove the Ethereum blockchain looking for opportunities. Given that more money is entering the crypto market, it was no wonder that the trades would become more sophisticated.

It was DeFi investors Dan Robinson and Georgios Konstantopoulos who first explained how a variety of attacks by bots are roving the Ethereum blockchain. They perform a function known as front running, which is to make an anticipatory trade. Allow me to explain.

Let’s say you can see in the line of bids that a large buy order on Ethereum is awaiting execution.

What would be good is if you can get in line just before this trade, and buy just as the price is about to go up. These bots do just that and are programmed to frontrun.

They bid a slightly higher gas fee and thus are ensured that their bid, which is for a much smaller total amount, gets executed first. As soon as the higher bid is executed, the bot sells and nets a small profit.

The ordeal is explained very well in Ethology: A Safari Tour in Ethereum’s Dark Forest which is a must read for any crypto enthusiast.

They explain that the bots work because they bid:

A slightly higher gas price on a transaction, incentivizing miners to place earlier in the order when constructing the block. The higher-paying transactions are executed first. Thus, if two transactions making a profit from the same contract call are placed in the same block, only the first takes the profit

LTCM

The last time I read about executing this kind of trades was back in the 2000s, when the Long-Term Capital Management fund came crashing down. Just like the front running bots they had thought of a method to profit from a fault in the market.

These Nobel prize laureates in economy had come up with convergence trading. In essence, they used quantitative models to exploit deviations from fair value in the relationships between liquid securities across nations and asset classes. Just like the front running bots they found a small gap in the market and profited from it.

Problem was that when the unthinkable happened, in their case the USSR stopped existing and all their bets were off, the market closed their loophole and they were left holding the losing cards.

For the front running bots as well, it could be a disaster of Russian making that gets in their way, Russian-Canadian that is. As the media covers this item, let’s see how fast Ethereum founder Vitalik Buterin closes this loophole and how many bots are left holding losing bets.