Autor Cointelegraph By Dilip Kumar Patairya

How to avoid front runners on decentralized crypto exchanges

How to avoid front runners on decentralized crypto exchanges

Uverejnil používateľ | máj 7, 2022 |

Decentralized exchanges (DEXs) nip in the bud several issues concerning their centralized counterparts such as concentration of liquidity in the hands of a few players, compromise of funds in case of a security breach, closed control structure and more. One issue, however, that has refused to subside is front-running. Unscrupulous players are still finding ways to defraud unsuspecting traders.If you have received less than expected when placing a trade on a DEX, there is a pretty good chance of you getting hit by front runners. These bad actors exploit the automated market maker (AMM) model to make profits at the expense of unsuspecting traders. This article will explain the attack vector and help you understand the basic concept of front-running in crypto trading, the potential consequences and how to prevent crypto front-running.What is front-running in crypto?The term “front-running” refers to the process when someone uses technology or market advantage to get prior knowledge of upcoming transactions. This allows the bad actors to take advantage of the forthcoming price movement and make economic gains at the cost of those who had introduced these transactions. Front-running happens via manipulations of gas prices or timestamps, also known as slow matching.On centralized as well as decentralized exchanges, front-running is a frequent activity. The objective of a front runner is to buy a chunk of tokens at a low price and later sell them at a higher price while simultaneously exiting the position. When executed precisely, it brings in risk-free profits for the traders committing it.Related: DeFi vs. CeFi: Comparing decentralized to centralized financeTrading of stocks and assets based on insider knowledge to take advantage of the price movement has been a well-known tactic. Though illegal and unethical, brokers have been engaging in it. The tactic closely resembles insider trading with just a minor difference that the executioner works for the client’s brokerage and not the client’s business.What is a front-running bot?Frontrunning is done using crypto front-running bots functioning on a millisecond-scale timeframe. Before a person blinks, they can read a string of transactions, calculate the optimum transaction size and gas price, configure the transactions and run them.The core of a front-running bot functions by listening for the pending transaction on the blockchain. Interacting with the blockchain using an interactive script, the bot buys before the buyer and sells right after it. The bot analyzes the trends of the crypto and executes transactions to make a profit. Front-running tactics on decentralized exchangesWhen a trade occurs, the system broadcasts it to the blockchain, requiring miners to verify the transaction. However, in any blockchain of significance, the stream of incoming transactions is more than the capacity of the subsequent block. Unmined transactions are left in a pending transaction pool called a mempool.Blockchain mempools are transparent, a feature that the front runners exploit. Getting insight into the mood of the traders, they are able to predict the upcoming price movements and place their own orders accordingly. They set a higher gas price on their transactions to encourage picking their transactions before the pending ones, thus front-running the unsuspecting traders. Ways to prevent front-running on the trader sideThere is no single solution to solve issues regarding front running on all platforms. Rather, various anti-front-running approaches need to be followed on different projects, depending on the scenarios.Use large liquidity poolsFront runners are fond of low liquidity pools, as there is less chance of competition as well as disruption of their transaction by a large order that unexpectedly alters the pool weighting. Executing your trades in large liquidity pools makes it less likely to get hit by frontrunning. Keep maximum slippage lowDoes the question “How do I avoid slippage” perennially pricks you? What you can do is set a maximum slippage tolerance in most decentralized exchanges. In other words, you can fix the maximum deviation from the expected return. An example will help you understand the scenario better.Suppose you place an order on a DEX and expect a return of 500 Tether (USDT) for it. If you set your slippage to 1% of your order, then you won’t be receiving less than 495 USDT. However, if higher slippage tolerance is greater, there will be more deviation.So, the formula is simple: Keep maximum slippage low, around 0.5%-2%, to fend off front runners. If you are going to place a large order, keep your slippage at the lower keel. Front runners want you to keep slippage high, so better to do just the opposite of it. Overpay on gasFront runners are delighted to see slow transactions because it gives them more time to devise an order for riding your trade and making profits. Underpaying on gas makes your transactions queue up for longer, providing front runners more time to formulate their strategy and damage your interests.Overpaying on gas motivates miners to validate your transaction faster, minimizing your odds of becoming the target of a bad actor. For this purpose, you might set the gas price to higher than average or simply use the fast gas option on your wallet. If you are placing a large value order, it becomes even more important to try and complete the transactions with alacrity. Place a low-value orderTo make a profit, front runners have to meet some minimum thresholds. They have to pay the gas fees twice, on entering and exiting the market, and also recover the amount paid as the trading fee. Their profits begin only after they get back their expenses.Currently, prominent Ethereum-based automated market makers such as Uniswap, Balancer and SushiSwap pay a gas fee of $25 per transaction. As they need two transactions to execute frontrunning, they are likely to spend $50 to complete the trade. It also means if your trade is raking in less than $50 profit, there are negligible odds of you becoming the target of the frontrunners.When you enter a low-value trade, you practically make it an unprofitable venture for frontrunners. Most of the time, trading with amounts under $1,000 is safe. Find a takerA publicly-hosted order book is the first thing to draw front runners. If you manage to find a taker, you will be able to fill a given order and will be able to keep away from public markets and, subsequently, front-running. When you find a taker and negotiate a price successfully, a trustless on-chain exchange gets executed. Ways to prevent front-running on DEX sideDEXs can take care of several design points to make front-running difficult to execute:Quick matchingFront runners look for slow matching speed to place their orders before the execution. A DEX can ensure fast matching to leave little room for front runners to put their process to motion. Super quick block time will effectively make the front runners unable to react. For most frontrunners, who are not so technically inclined, this should be enough.Decentralized match engineIn the case of a centralized matching engine, it is hard to establish that the exchange itself is not involved in front running. Decentralized matching engines, on the other hand, allow anyone running a full node to view the matching in real time. They can match the transaction in the latest block manually with the current order book. Periodic auction matchingPeriodic auction matching adds an extra layer of security from the front running. It adds a non-deterministic layer making it improbable for anyone to know the next execution price unless they are aware of the matching logic, the incoming orders for the next block and the trade price and the current order book from the last match. How to avoid front-running in Ethereum 2.0Some traders wonder about the impact of the full release of Ethereum 2.0 later in 2023, merging the mainnet with Beacon Chain and introducing a proof-of-stake (PoS) consensus mechanism. Validators who are supposed to process transactions in an epoch will be intimated of their positions beforehand.An epoch is a defined span of time in a blockchain network. This time frame is used to describe when certain events in a blockchain network will take place, such as when incentives will be distributed or when a new group of validators will be allocated to validate transactions.Related: Ethereum upgrades: A Beginner’s Guide to Eth2In this scenario, it will be harder for front runners to find profitable trades in a blockchain teeming with transactions, but not impossible. Many frontrunners out there are technically proficient, so you can’t just rule out the possibility. DEXs can cover design points like quick matching, decentralized match engine and periodic auction matching to minimize the odds of front-running.

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What is crypto lending and how does it work?

What is crypto lending and how does it work?

Uverejnil používateľ | apr 12, 2022 |

The COVID-19 pandemic had a deleterious effect on the returns from the conventional instruments of investments such as stocks, gold and real estate, driving investors in hordes toward crypto. Individuals and institutionalized investors alike have tried their luck in the industry that has rolled out decent returns even during the worldwide economic slump that horrified many investors.Despite an intense debate raging about cryptocurrency offering a great window to grow wealth with alacrity and its extremely volatile ways, there is no denying the fact the industry has grown rapidly over the last two years. It is still innovating, trying different ideas and breaking more barriers in the process. One of these areas is crypto lending.What is crypto lending?Crypto lending is an ingenious instrument to obtain the cash you need quickly, as it allows you to utilize your crypto holdings as security to get secure loans. If you are wondering how do I borrow crypto, collateralized crypto lending is a viable solution. It allows borrowers to use their crypto assets as collateral to get a fiat or stablecoin loan.This enables you to get the money without having to sell your coins, use the cash to fulfill your objectives and then repay to get back the hold on your assets. Crypto loans allow you to use digital assets you hold to generate dividends by lending out part or whole of the holdings.Crypto lending platforms play a key role in dispensing such loans. Generally, you can borrow up to 50% of the value of your digital assets, though some platforms might allow you to borrow even more. Crypto loans generally don’t have a concept like EMI and borrowers may repay when they can before the fixed term ends. As for the interest rates, it is approximately 4% on Celsius Network on popular non-stablecoin cryptocurrencies.As for the question, is lending crypto profitable, it depends on a string of factors. If you default on your debts, you end up losing your assets. Inconsistencies integral to crypto assets have led to more takers to stablecoin lending. On Celcius Network and Nexo, stablecoin lenders can earn 8%, while on Compound Finance — a decentralized crypto lending platform — the lending annual percentage rate (APR) for Dai (DAI) and USD Coin (USDC) is 12% and 9%, respectively.Related: What is yield farming in DeFi?How does stablecoin lending work?When it comes to interest rates, peer-to-peer (P2P) lending and borrowing models are closely influenced by the supply and demand scenario. A high volume of loans coupled with a low supply from lenders means high returns for lenders. However, if the demand for crypto loans is low and the supply from lenders is high, the interest rate for borrowers will be low to attract the borrowers. If you are considering why do stablecoins have high-interest rates, this section may come across as quite informative. The principle idea of supply and demand leads to stablecoin lending, providing annual returns in double digits. Stablecoins are still a budding industry, being just 2-3% of the total crypto market capitalization. On the lending platforms, a substantial amount of the lending supply comes from stablecoins. Many buy these coins only to lend them on these platforms, but it’s alarmingly low compared to the supply of the top cryptocurrencies. Take the case of Compound Finance, where Ether (ETH) has 50% more gross supply than DAI and USDC combined.Contrast it with the demand and you will find the figures are staggering. On Compound Finance, the demand for DAI trumps that of ETH by nearly 40 times. Large institutional traders and cryptocurrency payment processors are behind the huge demand for DAI. Institutional traders include the hedge funds and market makers clubbing on crypto loans for speculation purposes.How does crypto lending work?Just like a securities-based loan, a cryptocurrency-backed loan collateralizes digital currency. Basically, it resembles a mortgage loan. You give hold of your crypto assets to get the loan and repay it over a predetermined time. These types of loans can be obtained through a crypto lending platform or a crypto exchange. Though you still retain ownership of the collateralized crypto, you forego the right to make transactions using digital coins.Crypto loans come across as a viable option because of several advantages such as low interest rates, choice of loan currency, lack of credit check, fast funding and the ability to earn passive income on your crypto that is otherwise lying idle. Moreover, you can lend your own digital coins and receive a high APY (more than 10%) on several crypto platforms.All crypto lending transactions have two distinct parties: the borrower and the lender. It is for the borrower to deposit crypto assets as collateral to secure the loan from the lender. The arrangement works to mutual advantage, as the borrower receives an immediate loan in return for their crypto assets while the lenders earn interest on the amount released as a loan. If the borrower defaults, they dispose of the underlying crypto assets to realize their money.Steps of crypto lending explained Whether you are looking for crypto lending on Binance, Coinbase or any other platform, the basics remain the same. Borrowers have to go through the following steps.For the lenders, the steps to lending are provided: Things to know before getting into crypto lending and borrowingCrypto lending is a replication of collateralized loans in fiat. You need to be careful of a few factors when dealing in cryptocurrencies.Related: ‘Big Time’ Margin Call Can Skyrocket Bitcoin Price in Mid-Term: AnalystShould you lend crypto?You may be eager to know if crypto lending is safe. Before you go active on a crypto platform as a lender, make sure you are well-versed with the specifics. When you move your crypto to any platform for lending, they hold access to the keys to the cryptocurrency — not you. You just have the bond issued by the smart contract. Check the auditing standards of the smart contract, the history of the project and its team can help you guide your decisions.If you begin lending with your eyes closed, do not be surprised if your crypto disappears. QuadrigaCX, for instance, is nothing less than a horror story. A Netflix documentary discussed the suspicious death of Gerald Cotton, the founder of QuadrigaCX, the Canadian cryptocurrency exchange and how he misappropriated customer funds. About $190 million worth of digital assets kept on the exchange were lost.To sum up, you need to do your due diligence before taking a call on the platform you’d be using for lending and borrowing. Regardless of the lending platform, knowing your game and limitations is extremely important when it comes to successful innings. A mistake might prove costly, so better put in the best of your exploratory skills to work.

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Is Bitcoin a hedge against inflation?

Is Bitcoin a hedge against inflation?

Uverejnil používateľ | apr 3, 2022 |

Putting money in store of value investments like gold, real estate, stocks and crypto helps curb inflation. As cash loses purchasing power over time, keeping cash leads to people losing their savings. This has prompted people to put their money in store of value investments such as gold, real estate, stocks and, now, crypto. Will Bitcoin protect against inflation has been a question in the town ever since. To be held as a store for value, an asset should be able to hold its purchasing power over time. In other words, it should increase in value or at least remain stable. Key properties associated with such assets are scarcity, accessibility and durability. Gold as a hedge against inflation During past inflationary periods, gold has had a mixed track record. In the 1980s, there were times when holding gold gave negative returns to owners. Morningstar data gives a peek how gold has had a spotty track record during past inflationary periods. A commodity that is supposed to hedge against inflation is expected to rise when consumer prices are going up. During periods of high inflation, particularly in the 1980s, there were times when gold owners ended up fetching negative returns. In recent times, gold has slowly lost its luster as a hedge. During the pandemic and even when waves have subsided, people are showing less interest in gold. It is still viewed as good enough for holding value in the long term, but for the short term, the metal is seen as less reliable now. Real estate as a hedge against inflation The popping of the U.S. housing bubble underlined that real estate couldn’t always be trusted as a hedge against inflation. For a long time, real estate has been regarded as an effective hedge against inflation. This myth, however, was busted in the United States housing bubble. In March 2007, home sales and prices in the country suffered from a sharp fall. As National Association of Realtors (NAR) data reveals, sales dropped 13% to 482,000 from the peak of 554,000 in March 2006. In America and around the world, real estate prices are closely linked with factors like government policy, political and economic stability of the country, local demographics and economy, geographical location and infrastructure, among others. Parameters are simply too many for a regular person to understand. Stocks as a hedge against inflation Long-term investment in stocks helps in tiding over the effects of inflation. Just make sure that the company has strong fundamentals. Some stocks do help protect the value of your investment. Even if these stocks get hit by impatient investors in the short term, they recover well over time. But you need to factor in that not all stocks work well for hedging inflation. You need to find companies that have strong fundamentals and are more likely to draw better dividends for their shareholders. A common thread: Link of gold, real estate and stocks to centralized entities Traditional asset classes are controlled by centralized authorities, making them vulnerable to prejudices and pressures. The value proposition of all conventional asset classes is invariably linked to policies of the centralized authorities such as the governments or federal banks. An asset so intrinsically associated with a system that the asset holders cannot interfere with isn’t really a reliable hedge, as the centralized authority exercises a single button control over the proceedings.

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How do you assess the value of an NFT?

How do you assess the value of an NFT?

Uverejnil používateľ | mar 12, 2022 |

Understanding the valuation matrixThere is no rule book on how to assess an NFT valuation. The metrics you use for evaluating private companies or conventional investment vehicles such as shares are simply not applicable to NFTs. Usually, the payment rolled out by the last buyer gives some indication of the value. For NFTs, however, it is hard to guess what the next buyer might pay, depending on their estimates.Most buyers lack the skills to ascertain the value of NFTs logically and base their quotes on guesswork. For sellers too, it is hard to determine what they might end up receiving for the tokens they hold. Over time, the value of NFTs is driven by a perception over which both buyers and sellers may lack any control.An example can bring home the point even better. An artwork NFT might be in great demand for a certain time, with possible buyers assuming it is rare and expecting to derive value in near future. Then, all of a sudden, they may discover that the digital image is available on the Internet for free and there might be no buyers left for the NFT.Related: Nonfungible tokens: How to get started using NFTsFactors that determine the value of NFTsArtwork NFTs of renowned artists or tokens associated with tangible assets of repute might have defined values. In most cases, however, investors and traders find it hard to determine what an NFT is worth.RarityDemand for an NFT is directly proportional to its perceived scarcity but how can you tell how rare an NFT is? Unique artworks from renowned illustrators might make good examples of rare NFTs as will the tokens minted by top-grade celebrities. Some rare game items can also successfully call for this category. Rarity factor brings in plenty of intrinsic value to these NFTs.An immutable proof of ownership gives the holder of the NFT a sense of distinction and subsequently, value. Everyday’s The First 5000 Days by Beeple and Jack Dorsey’s first NFT are prime examples of NFTs with a rarity element.UtilityFor figuring out how to evaluate NFT projects, utility emerges as a key parameter. To carry value, an NFT needs to have a utility in a real application. For instance, NFTs could be used for tokenizing real estate, precious metal and even securities; to represent virtual land or game assets and in many more ways. The NFT world is still at a nascent stage and as it matures, new innovative use cases are sure to emerge.Right after minting, an NFT draws value from its inherent characteristics. Over time, the value accrues depending on the utility and community strength of the underlying project. Decentraland NFTs, which refer to virtual land plots in the project, are an excellent example of such tokens.Related: How to create an NFT: A guide to creating a nonfungible tokenTangibilityNFTs associated with real-world objects draw an element of tangibility. Clubbed with ownership immutability on blockchains, it creates an immediate value in tangibility. NFTs can be effectively used to underline ownership rights and eliminate instances of fraudulent activities. The practical use of NFTs in the projects in which they are involved has a bearing on their value.NFTs holding tangible value are the perfect fit for short-term as well as long-term trading. Some NFTs, like tickets, might have expiry dates, while others, such as those representing real estate, can cultivate more value over time.InteroperabilityA key factor in the NFT value proposition is interoperability, i.e., the ability to use the tokens in different applications. For instance, if the same weapon can be used in different games, there are more chances of the token accruing value. How the nonfungible tokens work on different blockchains is always going to make transactions simpler.It is hard to realize interoperability, however, as developers have to build a vast network of applications on which the tokens can be used. A set of attractive use cases help infuse interoperability of the NFT. Another strategy developers could follow is to develop partnerships with other projects to bring benefits to people who own their tokens.Social proofThe social proof associated with the project behind an NFT is one of the decisive factors that determine the NFT’s value. Checking their profiles on social media platforms like Twitter and Instagram can help one gauge their acceptability. If the numbers lie low, it indicates they haven’t yet been able to create a solid ground for themselves.When encountering any person or project for the first time, there is a natural tendency to take cues from the people around the project. Social proof indicates what people, in general, think about a project and helps in making a decision.Ownership historyThe identity of the issuer and previous owners of an NFT has a bearing on its value. Tokens created by eminent persons or corporate entities benefit from a high ownership history value. You can enhance the NFT value proposition by working in tandem with people or enterprises with strong brand value for issuing the NFTs.Reselling NFTs previously held by influential people is another way to gain traction. Marketplaces and sellers can help buyers find information about previous owners of NFTs by providing a simple tracking interface. Highlighting the addresses of investors who took home a good amount from NFT trading will help buyers gain valuable insights.Liquidity premiumNFTs with high liquidity carry higher value as well. Secondary markets provide a venue to trade ERC or BSC standard NFTs in a frictionless manner, immediately giving access to buyers. Traders prefer to put their money in NFT categories with a high trading volume as more liquidity helps them take their profits with ease. A highly liquid NFT is likely to retain its value even in case the associated platform is closed.Token economics stresses increasing engagement and subsequently, liquidity will propel the NFT value proposition upwards. An in-built system that depreciates NFTs on being idle for long and encourages competitive assets can help to build a robust market. As the NFT market grows, systems will come in place to support the liquidity of assets.SpeculationThere are times when speculation becomes the catalyst behind price appreciation, for instance, the price of CryptoKitty #18 skidded from 9 ETH to 253 ETH in just three days in December 2017. While one line of thought critically opposes speculation as one of the drivers of valuation, speculating comes naturally to humans and cannot be eliminated practically.Even in the conventional financial system, instruments like derivatives are based on speculation. In this light, speculation becoming a non-trivial component of the NFT ecosystem isn’t a surprise. Price performance charts of NFT items, changes in the assets lying underneath of projects, and even events beyond your direct control can fan speculation and drive the prices of NFTs.Continual change in the NFT ecosystemNFTs are a nascent ecosystem undergoing continual evolution. Various factors influencing the value of NFTs are rapidly evolving and to augment accuracy, you need to take them all into account. Moreover, value is broadly a subjective concept, though you may argue that the discussion is about intrinsic value. In this scenario, resolving how you determine future NFT value becomes even more challenging.As NFTs are an asset class with endless possibilities, we can safely assume that their versatility will steadily grow and lucrative opportunities will be available in various sub-categories. The number of use cases of NFTs has been increasing at a great pace. Now, NFTs can be used in applications like ticket distribution to ensure voting rights.While exploring an NFT value estimator, you just need to be mindful that all things that shine aren’t diamonds. So be patient and take into account a full array of factors while arriving at a decision. At a time when all sorts of NFT marketplaces are coming up, from all-inclusive platforms like OpenSea to niches such as Real Nifty, doing your due diligence and making an informed decision becomes especially important.

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