What is front running

Front-running is a stock market term that refers to entering the market ahead of the competition by leveraging insider information about upcoming transactions. As a result, it is classified as insider trading.

Front-running does not just occur in the stock market and the decentralized finance (DeFi) ecosystem; it may also occur in nonfungible token (NFT) exchanges. It happens because an insider at an NFT platform knows which NFTs will be widely advertised on the trading site. Furthermore, with this knowledge, they may purchase an NFT before it is highlighted, so increasing its price. The price rises because the NFTs are promoted for sale, and the insider profits handsomely.

As a result, this type of front-running is known as insider trading, because the assets are exchanged based on non-public knowledge. For example, Nate Chastain, the head of product at the NFT marketplace OpenSea, was revealed to have acquired NFTs right before they were promoted on the OpenSea website in September 2021. He then profitably sold them. He used insider knowledge, such as which NFTs OpenSea would promote, to gain an unfair advantage. An imaginative person, on the other hand, identified this unlawful conduct by connecting the NFT transaction timestamps to the top page promotions of the NFTs in question on OpenSea.

Front running is forbidden in the conventional stock market since outsiders do not have access to insider information. In the cryptocurrency market, however, all information is maintained in a publicly auditable digital ledger. As a result, front running NFTs and cryptocurrencies is not deemed prohibited. The internet's ability to transmit knowledge improves market leadership in the bitcoin sector. While conventional trading is prohibited because the trader is using non-public data, a trader on a decentralized exchange (DEX) is using data that is publicly available on the blockchain and is not technically shorting the system.

Front-running as a DEX trading technique is advantageous if you know the list of buy or sell orders ahead of time and can input your order before other trades are inserted. If the decentralized exchange is constructed on top of a public blockchain, the trader will be able to observe incoming orders locked inside smart contracts (e.g., Ethereum). If it is financially possible, the trader might set a larger fee for placing the order than the incoming orders. As a result, the trader will be able to claim more profitable orders.

Front running may be detected by tracking user trade data such as wallet addresses, NFT purchases followed by sells, and a sequence of fund transfers. The three major data points to evaluate for detecting front-running in NFTs are the front runner's acquisition or sale of a financial instrument, the genuine transaction, and the front runner's probable unwinding of the financial instrument to bring the cycle to an end.

Analysts could also look for buy/sell orders close to an NFT artist's buy/sell order in the same instrument that influenced the NFT's price to spot any potential front-running methods.