Sandwich Trading
Sandwich Trading Key Points
- Sandwich Trading is a manipulation tactic used in decentralized exchanges.
- It involves a malicious trader placing orders on both sides of a target transaction.
- The aim is to manipulate the price of a cryptocurrency temporarily.
- Sandwich Trading can lead to losses for regular traders and is considered a form of front running.
- It is possible due to the transparent nature of blockchain transactions.
Sandwich Trading Definition
Sandwich Trading is a type of trading manipulation that occurs on decentralized exchanges. It involves a malicious actor (the sandwich trader) placing a transaction (buy or sell order) on both sides of a target transaction, with the aim of influencing the price of a cryptocurrency to their advantage.
What is Sandwich Trading?
In the context of cryptocurrency trading, Sandwich Trading refers to an exploitative tactic where a malicious actor places a buy order, followed by a sell order around a target transaction. This sandwiching of the target transaction is done with the intent of manipulating the price of a specific cryptocurrency temporarily.
It essentially allows the sandwich trader to profit at the expense of the target trader.
Who Does Sandwich Trading Affect?
Sandwich Trading primarily affects regular traders on decentralized exchanges. These individuals may experience losses due to the artificial price manipulation caused by sandwich traders.
Moreover, it can undermine the perceived fairness and transparency of decentralized exchanges, potentially deterring new users.
When does Sandwich Trading Occur?
Sandwich Trading can occur at any moment in a decentralized exchange. Due to the transparent nature of blockchain transactions, a malicious trader can spot a pending transaction and quickly place their orders around it.
It is most common during periods of high trading volume, as more transactions create more opportunities for sandwich traders.
Where Does Sandwich Trading Happen?
Sandwich Trading primarily happens on decentralized exchanges. These platforms operate on blockchain technology, which allows for the transparency needed for sandwich traders to spot and exploit pending transactions.
It is less common on centralized exchanges, which typically have mechanisms in place to prevent this type of manipulation.
Why is Sandwich Trading an Issue?
Sandwich Trading is problematic because it undermines the fairness of the trading process. It allows certain traders to profit at the expense of others through manipulation, rather than through conventional trading strategies.
Furthermore, it can discourage new traders from participating in the market, which can potentially hinder the growth and development of the cryptocurrency ecosystem.
How is Sandwich Trading Executed?
A sandwich trader identifies a pending transaction on the blockchain and places a buy order at a slightly higher gas price to ensure it gets processed first.
Once the target transaction is executed, the sandwich trader immediately places a sell order, again with a higher gas price.
This quick buy-sell sequence temporarily inflates the price of the cryptocurrency, allowing the sandwich trader to make a profit.