Backrunning

Back-running occurs when a transaction sender wishes to have their transaction ordered immediately after some unconfirmed "target transaction". In the context of decentralized finance (DeFi), it is a strategy where traders or bots place transactions immediately after a large and expected market-moving transaction, but before it is confirmed on the blockchain. Unlike front-running, where traders try to get ahead of an anticipated transaction, backrunning capitalizes on the expected price change caused by a significant trade. For instance, if a large purchase of a token is expected to increase its price, a backrunner would quickly execute a buy order right after the significant trade is detected but before it is finalized, aiming to benefit from the subsequent price appreciation.

Consider a back-running bot designed to exploit new token listings on Uniswap. This bot scans the Ethereum mempool for the creation of new trading pairs, signaling a fresh token launch. Upon identifying a new pair, the bot immediately places a buy order right after the initial liquidity has been provided. Its strategy involves purchasing a substantial amount of the new tokens, though it ensures that enough tokens remain for others to buy, facilitating a subsequent price increase. As additional traders purchase the token, driving up its price, the bot waits for a favorable rise and then sells the tokens at the elevated price, securing a profit. The effectiveness of this approach hinges on being the first to execute the buy order after the token's launch, capturing the best initial rates.

To maximize the likelihood of their transactions being mined immediately after their target, typical backrunners deploy multiple identical transactions. These transactions often match the gas price of the target transaction precisely, enhancing their chances of being included in the same block or directly following the target. This tactic is sometimes executed from multiple accounts to further distribute the transactions and increase the odds of success. By closely mirroring the gas price of the target, backrunners aim to slot their orders as close as possible to the new pair creation, thus effectively leveraging the price movement triggered by the new token listing.

While back running can be profitable, it comes with several challenges and risks.

• The strategy relies heavily on the ability to detect and respond to large transactions quickly, which requires advanced technology and constant monitoring.

• The competition is fierce; multiple bots might be vying to backrun the same transaction, leading to a crowded and costly race.

• The transparency of the blockchain means that any unsuccessful back running attempts can result in losses from transaction fees without securing the intended gains.

• This practice can contribute to network congestion and increased gas fees, impacting the overall efficiency of the blockchain.