What is front-running in crypto and NFT trading?

What is front-running in crypto and NFT trading?

Front-running is a type of insider trading that affects an asset’s market price. Read this guide to learn how to prevent front-running in crypto.

How to prevent front-running in crypto?

Users can limit front-running by splitting the transaction into many smaller transactions and adjusting the low slippage. Similarly, developers can use anti-front-running measures like making transactions private and using a hidden mempool. 

Users can break large transactions into smaller ones instead of executing them all at once, which reduces the appeal of transactions with front-running bots due to the value that can be mined. As a result, bots will pass the transaction instead of front-running it.

When the bot places trades, it will also alter the price; therefore, keeping the adjustment slippage minimal will prevent customers from losing money. On the other hand, adjusting the low slippage can make the transaction more challenging to execute.

SparkPool’s TaiChi network is a private transaction service that helps developers limit front-running in the crypto space. The miner-extractable value (MEV) bot is unable to find transactions on mempool because user transactions are only visible to Sparkpool and not to other Ethereum nodes. MEV is a metric that tells how much money blockchain miners can gain by arbitrarily including, excluding or reordering transactions.

KeeperDAO uses the Hiding Book mempool, which is a secret Mempool. Therefore, the Keeper bot will profit from MEV through arbitrage trading or asset liquidation by passing through transactions and loan requests. MEV revenues are deposited in the ROOK treasury, and users receive a portion of the profits in ROOK tokens. To avoid front-run slippage, these transactions are offered free of charge.

How to detect NFT front-running?

Front running can be identified by monitoring users’ trade data, such as their wallet addresses, purchases followed by sales of NFTs, and a series of fund transfers.

The acquisition or selling of a financial instrument by the front runner, the legitimate transaction, and the front runner’s potential unwinding of the financial instrument to bring the cycle to a close are the three significant data points to consider while detecting front-running in NFTs.

Additionally, analysts should search for buy/sell orders close to an NFT artist’s buy/sell order in the same instrument that impacted the NFT’s price to notice any potential front-running tactics.

Furthermore, the compliance team should be able to use the trade reconstruction capabilities (pulling together different streams of data) to connect unstructured data, such as voice and electronic communications, to the trades to offer context, such as genuine dialogues with buyers (if selling NFTs), to rule out the wrongdoing.

How is wash trading crypto different from front-running tactics?

Wash trading is when an investor sells and buys the same asset to inflate the value of security artificially. On the other hand, a front-running attack on a blockchain occurs when a malicious user discovers a swap transaction after it has been broadcasted but before it has been finalized and reorders transactions to their benefit.

The NFT market is particularly susceptible to a practice known as wash trading. Several NFT trading platforms allow users to trade without identifying themselves by connecting their wallets to the site. This means that a single user can establish many wallets and link them to a platform. 

After that, a person can control both sides of an NFT trade, selling it from one wallet and buying it from another. The trade volume increases as numerous similar transactions are completed. As a result, the underlying asset appears to be in high demand.

Similarly, front-running tactics like sandwich attacks focus on exploiting DeFi protocols and services. Sandwiching occurs when two orders are placed, one before and the other after the trade. In this case, the attacker will front-run and back-run simultaneously, sandwiching the original pending transaction in the middle.

A victim trades a cryptocurrency asset X, for example, Cardano (ADA), for another crypto-asset Y, for example, Ether (ETH), which is used to make a significant purchase. 

Before the hefty trade is approved, a bot detects the transaction and front-runs the victim by purchasing asset Y, i.e., ETH. 

This purchase action increases the slippage (based on the volume to be traded and the available liquidity, projected price increase or fall) and boosts the price of asset-Y for the victim trader. Because of the high purchase of asset Y, its price rises, and the victim purchases asset Y at a higher price, which the attacker then sells at a higher price. 

Example of a sandwich attack

Another way of front-running includes a displacement attack in which the miner’s transaction replaces the original transaction; the replaced transaction can still be completed, but the result will not be as intended.

Is front-running illegal in crypto?

Front running is considered illegal in the traditional stock market because outsiders are not provided with insider information. However, in the crypto market, all information is stored in a publicly auditable digital ledger. Therefore, front-running NFTs is not considered to be illegal.

The internet’s power to disseminate information increases front-running in the cryptocurrency market. While front running is banned in traditional trading because the trader is utilizing non-public data, the trader on a decentralized exchange (DEX) is using data publicly available on the blockchain and is not technically shorting the system.

If you know the list of buy or sell orders ahead of time and can insert your order before other trades are inserted, front-running as a DEX trading strategy is beneficial. The trader will be able to see incoming orders locked into smart contracts on the decentralized exchange if it is built on top of a public blockchain (e.g., Ethereum). The trader can then establish a higher cost for placing the order than the incoming orders if it is commercially feasible. The trader will be able to claim more lucrative orders as a result.

What is a front-running bot?

A front-running bot scans pending transactions and pays a more significant gas fee so that miners process its transaction first to front-run a major trade that will affect market pricing.

Bots are pre-programmed programs that allow you to automate your trading. Rather than keeping track of every move in the market and waiting for a good time to buy and sell, the bot will automatically synthesize and assess market data and make asset transactions on behalf of customers. But, how do crypto front-running bots work?

Ethereum’s or the blockchain’s design permits all submitted transactions to halt in a mempool, where transactions are waiting to be processed. The mempool can be scanned by miners or bots for appropriate transactions to be utilized for front-running in cryptocurrency trading.

Front-runner bots typically work on a millisecond timescale. For example, they may read a transaction from the mempool, compute the optimal transaction size, configure the transactions and then execute them in a fraction of a second. It’s impossible to compete when manually operating.

By putting a buy order on the same block and simultaneously setting a higher gas price, the bot front-runs particular slippage, trade volumes and gas price transactions. When additional liquidity is added to an AMM (automated market maker) pool on the exchange, the front-run bot recognizes it and manipulates the order of transactions within a block to profit from another trader.

What is front-running in the NFT markets?

Front-running is a stock market phrase that refers to using insider information about impending deals to enter the market ahead of the competition. As a result, it’s a type of insider trading.

Front-running is not limited to the stock market and the decentralized finance (DeFi) space — it can happen in the nonfungible token (NFT) marketplaces, too. It occurs because an insider at an NFT platform knows which NFTs are going to be featured heavily on the trading site. 

Furthermore, with that knowledge, they can buy an NFT before it gets featured, ultimately raising its price. The price rises because the NFTs are publicized to sell and the insider makes a tidy profit.

Visual representation of front-running

Therefore, front-running of this kind is called insider trading, as the assets are traded based on non-public information. For instance, In September 2021, Nate Chastain, the head of product at the NFT marketplace OpenSea, was discovered to have purchased NFTs just before they were highlighted on the OpenSea site. He then sold them for a profit. 

He took advantage of insider information, such as which NFTs OpenSea would push, to obtain an unfair advantage. However, an enterprising individual discovered this illegal activity by matching the NFT transaction timestamps to the top page promotions of the NFTs in question on OpenSea.

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US DOJ Continues Crackdown On Crypto Criminals As It Charges Frosties NFT Creators For Fraud

US DOJ Continues Crackdown On Crypto Criminals As It Charges Frosties NFT Creators For Fraud

US DoJ To Seize Property From Attorney Who Helped Launder $400 Million For Crypto Scammers

Two young men have been charged with conspiracy to commit wire fraud and money laundering after allegedly ripping off Frosties NFT community. They face up to 40 years in prison if found guilty on both counts. The DOJ appears to be getting better at handling crypto crimes. The US Department Of Justice is ramping up […]

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How to convert your digital art into NFTs and sell it

How to convert your digital art into NFTs and sell it

With a set of creative skills and a personal computer, you can convert your digital at into NFTs.

What is an NFT?

NFTs are nonfungible tokens. The adjective “nonfungible” is often used in economics to represent features such as uniqueness and non-interchangeability. In the crypto space, nonfungibility simply indicates that one item cannot be exchanged for another.

A “token” as a unit of account is basically a certificate of validity stored on the decentralized blockchain, making digital assets traceable and accessible to everyone. As a result, NFTs are a one-of-a-kind virtual currency that can fall into pretty much any category and usually take the shape of paintings, videos, music, collectible items in video games or any other type of creative digital production.

Since NFTs boomed in early 2021, everyone is now buying and selling these tokens throughout the world. But, how can someone convert real art into NFTs and how can they sell them? Is it hard? Is coding necessary to make an NFT?

In a nutshell, the steps are quite simple. To understand the main procedure and its specifics, read this quick guide below.

What is crypto art?

Art is the most common use case for NFTs, and it is no wonder that crypto art in NFT form has recently exploded in popularity. The fact that the novel blockchain technology creates conditions that now allow artists to earn tens of millions of dollars from their digital paintings attracted many creative people who could only dream about such a level of ease and accessibility before.

Sensational high-profile auctions of NFTs linked to digital art have received considerable public attention. The most expensive sales hit the headlines as they fetched millions. In 2022, the most expensive NFT with a price of $91.8 million was “Merge” by pseudonymous digital artist Pak.

In 2021, Everydays: the First 5000 Days NFT collection by artist Mike Winkelmann, known as Beeple, was another very expensive auction and was sold for $69.3 million.

Crypto art is associated with unique art pieces created by well-known artists and sold on auctions on marketplaces that include not only popular NFT platforms but also traditional auction houses like Sotheby’s and Christie’s. Still, the majority of art in the crypto space is being created by unknown talented beginners.

However, some NFT collections including the pioneer one named CryptoPunks or the most hyped recently named Bored Ape Yacht Club are examples of generative art. This type of art is usually created with the help of various autonomous systems. The images in these popular collections are created by assembling a selection of simple picture components in different combinations.

Related: How to assess the value of an NFT?

How to turn your art into an NFT?

If you already wonder if you should convert your art into an NFT, the answer is obviously, “yes, why not try.” The process of creating an NFT is neither complex, costly nor technical. All it requires is a set of creative skills and a personal computer.

Again, it is worth noting that NFTs can potentially convert not only images but songs, videos, GIFs and other digital items. So, first, you need to choose a proper art field which suits you best. Depending on this, you will understand what set of skills you will need to become a real NFT creator.

For example, as a graphic artist, you will be required to use such graphic editing tools as Adobe Illustrator, Adobe Photoshop, MS Paint, CorelDraw and the like. You can also try alternative ways such as three-dimensional (3D) modeling which is known to be more difficult for beginners. If you choose 3D animation, you will be expected to use 3D modeling tools such as Blender or Cinema 4D to design animated graphics and characters that will then be converted into NFTs.

After that, you will need to come up with a unique idea for your single artwork or maybe a full collection and think about the content into which it will eventually turn.

Is coding necessary for NFTs?

It is quite easy to create an NFT from digital art without coding. The process of creating them is called minting. It is basically the act of publishing a unique instance of the token on the blockchain. NFTs are minted once they are created, similar to how metal coins are created and added into circulation.

After this procedure, the particular piece of digital art becomes secure and tamper-proof, as well as hard to manipulate. Since this digital item became an NFT, it can now be bought, sold and digitally tracked when it is resold or recollected.

For artists, minting NFTs into digital art is the novel way to monetize their work fairly. On most NFT marketplaces, artists can program a royalty clause upon minting so that secondary sales of their works will generate passive income for them. If the demand for the artwork increases and becomes famous and raises in value, the artists can benefit from it.

Minting is an automated process provided on most NFT marketplaces. To start it, you will need to take a few simple steps mentioned below:

Still, you can try to code an NFT yourself if you are already experienced in this sphere and want to become an NFT developer. To dive deeply into NFT programming, you need to take in mind that the Ethereum network still has a monopoly on the development of NFTs. 

The usual coding language used for NFT development is Solidity, which has been designed for developing smart contracts that run on the Ethereum blockchain. Others are Javascript and HTML/CSS. Additionally, the InterPlanetary File System is usually used to store artists’ NFTs.

Choosing the NFT marketplace to make and sell your NFTs

An essential part of the process of minting NFTs is choosing a proper NFT platform. The right choice depends on various factors like supported file format, crypto wallet matching, accessibility to the platform for users and a price to mint an NFT, or a transaction fee, which is a payment made to compensate for the computing energy required to process and validate transactions.

There are a bunch of various online NFT marketplaces in the crypto space and each of them operates slightly differently. The crucial thing for artists is knowing whether the platform is curated or if it is self-service based and choosing the one which is the most suitable, visited and user-friendly for them.

Self-service-based or non-curated NFT platforms provide free access to all artists. In order to upload NFTs onto them, you only need to register via crypto wallet and pay the transaction fee to mint an NFT. The most popular are such mass self-service NFT marketplaces as OpenSea and Rarible.

Curated NFT platforms are more selective about artists. To register and start minting your art on these platforms, you will need to submit an application with all the details about the NFT collection and your previous artistic experience.

Another visible disadvantage of curated NFT marketplaces is the long waiting period for the experts’ decision. Due to this stringent selection criteria, however, mostly top digital artworks are exhibited on such platforms so that buyers have more confidence in artists who collaborate with these platforms. Well-known curated platforms are SuperRare and Nifty Gateway, to name a few.

Related: The NFT Marketplace: How to buy and sell nonfungible tokens

Setting up a cryptocurrency wallet

A cryptocurrency wallet is a tool that you will need to access NFT platforms, sign transactions and manage your balances.

Before setting it up, the most important thing is to make sure that the wallet matches the cryptocurrency used on the NFT platform you intend to use. Since most NFT marketplaces are Ethereum-based, they accept Ethereum’s native cryptocurrency Ether (ETH) as a payment. Therefore, it is necessary to have a crypto wallet with some ETH handy.

There are plenty of crypto wallets with already millions of users. Many of them have diverse functionality and some of them have their own mobile applications and browser extensions for easy access to blockchain-based platforms.

The choice of a suitable cryptocurrency wallet depends on what kind of safety you are willing to have. The main types of them include custodial, noncustodial and hardware wallets. A custodial wallet is also known as a hosted wallet since users’ funds are automatically stored in it by a third party, similar to how banks keep the money in checking and savings accounts.

It is considered to be the most user-friendly and easy to set up. A noncustodial wallet gives users complete control of the security of their crypto and does not rely on a third party to keep funds safe. A hardware wallet, also known as a cold wallet, is a physical device that can keep users’ crypto offline and secure it even in the worst-case scenario when someone’s computer is hacked.

How to sell digital art as NFTs

NFT sale is likely to be the endpoint of your NFT minting. Most of the NFT platforms have a feature to choose a selling method or an option to set a price for your NFT while minting it.

Fixed price sale and auction are currently the main two ways for selling NFTs. A fixed-price sale is considered to be the easiest way as well as pretty transparent and direct. To sell your freshly minted NFT this way, you will only need to specify the price at which you want to sell it. Some platforms also ask to set a royalty percentage, the amount you will receive in case of future sales of your art, so pay attention to that, too.

Another way to sell your NFT is through an auction so that buyers can browse and bid on your digital art. Some auctions may be online-only, while others may end in a full-fledged live auction. There are usually two types of them.

The first type is an English auction, an increasing price auction where the highest bid wins in the end. A timed auction is a specific form of English auction when an NFT can be bid over a defined period of time and at the end, the collector who has submitted the highest bid has won. The second type is a Dutch auction, a decreasing-price auction in which the price drops until someone buys your NFT.

It is up to you which way of selling NFT to choose. Each way has their pros and cons, whether it is a possible lack of understanding the real value of your artwork when setting up a fixed price or dependence on time during sales through auctions.

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Ukraine launches NFT museum 'to keep the memory of war'

Ukraine launches NFT museum ‘to keep the memory of war’

“While Russia uses tanks to destroy Ukraine, we rely on revolutionary blockchain tech,” said the country’s minister of digital transformation Mykhailo Fedorov.

The Ministry of Digital Transformation in Ukraine has started an online nonfungible token museum aimed at preserving the timeline of major events starting with the Russian military invading the country.

In a Friday tweet, Ukraine’s minister of digital transformation Mykhailo Fedorov said the government launched an initiative with nonfungible token, or NFT, artwork depicting key moments from the Ukrainian perspective from Feb. 24 onward. The NFTs feature events starting at 5:45 AM local time on the day of the conflict, when Russia announced a “special military operation” in the Donbas region of Ukraine.

According to the NFT museum website at the time of publication, 54 NFTs of key moments in the war between Feb. 24 and Feb. 26 will be available starting on March 30, with proceeds of the sales in Ether (ETH) used “to support army and civilians.” The artwork includes a variety of events and sources based on Twitter posts from government officials, photos from news outlets, and the response of world leaders “accompanied by personal reflections.”

“While Russia uses tanks to destroy Ukraine, we rely on revolutionary blockchain tech,” said Fedorov. “[The NFT museum is] the place to keep the memory of war. And the place to celebrate the Ukrainian identity and freedom.”

The NFT museum boldly states:

“We will never let any single day of this period disappear from the ledger of world history.”

Source: Meta History Museum of War

In addition to raising funds for Ukraine’s military, the NFT campaign seems to be targeted in opposition to Russian state media, which many around the world have criticized for spreading propaganda and misinformation, particularly in regards to the events in Ukraine following Feb. 24. The project said one of its goals was to “spread truthful information among the digital community in the world.” 

Ukraine’s government hinted at a NFT project after cancelling plans for an unspecified token airdrop on March 3. Deputy minister of digital transformation Alex Bornyakov later said in a report from U.K. news outlet The Guardian that it planned to release an NFT collection that would be “like a museum of the Russian-Ukrainian war.” The Ministry of Digital Transformation partnered with team members from NFT platform Fair.xyz for the blockchain infrastructure of the project.

Related: Amid conflict, NFT projects already seek to rebuild Ukraine

Ukraine’s government has accepted crypto donations directly through wallet addresses provided by the Ministry of Digital Transformation since Feb. 26. Cointelegraph reported that as of March 9, many charities, relief organizations and government wallets had received roughly $108 million in crypto toward humanitarian causes and military aid in Ukraine.

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