In the U.S. stock market, front running is usually an illegal practice. When brokers buy stocks using insider information about large upcoming trades, it’s called front running. As with most things in the cryptocurrency market, front running is a different beast.
While front running isn't inherently illegal in the loosely regulated crypto market, it's frowned upon in certain circumstances. Here’s what to know about front running in crypto, including how it works, when it’s looked down upon, and measures certain organizations are taking to quell it.
What does it mean to "front run" crypto?
Front running crypto means buying an asset based on information you have about upcoming transactions. Front running is more common in crypto than the traditional stock market for one key reason. Blockchains store information about all of the transactions on a public ledger, with each transaction having its own block. You don’t have to be an insider to gain access to information that could put upward pressure on an asset.
To front run in crypto, you don’t need to know the identity of the person behind the transaction. The details of a purchase are enough information.
Front running crypto isn’t illegal, but is frowned upon in some cases.
One area of muddied waters is NFTs. Traders can front run blockchain-based NFTs. NFTs are more centralized than blockchain transactions. While they’re still decentralized, there's some sort of organization behind the creation of an NFT collection. For example, companies (like the NBA or Outside Interactive) have their own NFT collections. In this case, there are clear insiders who can use information to snag an NFT at a low price and resell it for more cryptocurrency.
One example of front running NFTs is OpenSea’s former head of product Nate Chastain, who quit the company after reports surfaced of him buying NFTs before they were publicly posted and profiting off of their quick rise in value. OpenSea has since implemented rules to prevent this kind of front running.
This gray area may also include some cryptocurrency assets, especially around a minting or initial coin offering from an organized set of individuals.
Where do front-running bots in crypto stand?
Front-running bots automatically scan ledger transactions and offer a higher gas fee to beat out a big trade. This incentivizes the miner to favor the bot before the large transaction and allows the bot to profit off of the gain that occurs as a result.
Some developers have put measures in place to prevent front running on their protocols. For example, a blockchain could make transactions private (although many crypto enthusiasts prioritize transparency). Another (more likely) option is to hide the mempool, where transaction data about unconfirmed transactions lives. This prevents front runners and front-running bots from being able to beat out incomplete trades.
While front running crypto is fairly common, there are limitations to its acceptance. Blockchain and crypto developers have found creative ways to limit the option to front run while retaining the transparency that makes the market what it is.