Backrunning

The core mechanic relies on the order of execution within a block. A backrun transaction is placed in the mempool with a higher gas price than the target, ensuring it is mined in the subsequent block position. This exploits the state change caused by the initial transaction, such as a large DEX swap that moves an asset's price.

• Key Condition: The backrun must execute in the same block as the target transaction.
• Purpose: To profit from the arbitrage opportunity or liquidation created by the target's execution.

The most common application is on-chain arbitrage. When a large swap on a decentralized exchange (e.g., Uniswap) creates a price discrepancy between pools, a backrunner can:

• Detect the pending swap in the mempool.
• Submit a transaction to buy the undervalued asset on one DEX and sell it on another.
• Profit from the price difference, capturing value that would otherwise remain unrealized.

This activity is often considered beneficial MEV as it helps correct market inefficiencies.

It is critical to differentiate backrunning from its adversarial counterpart, frontrunning.

• Frontrunning: A transaction is placed before the target transaction, often by copying its intent (e.g., sandwich attacking) to profit at the target user's expense.
• Backrunning: A transaction is placed after the target, capitalizing on the new state it created without directly interfering with its execution.

Backrunning is generally less harmful to the original user, as it does not alter their transaction's outcome.

Backrunning is executed by automated bots known as searchers. They monitor the mempool for profitable opportunities using sophisticated algorithms. Once a target is identified, the searcher:

1. Simulates the target transaction's outcome.
2. Constructs a profitable backrun transaction bundle.
3. Submits this bundle, often via a relay, to a block builder.

The block builder includes both transactions in the correct order to capture the MEV, paying the searcher a portion of the profits.

The ecosystem has developed protocols to manage and democratize access to backrunning and other MEV.

• Flashbots SUAVE: A decentralized block-building network that aims to separate transaction ordering from block proposal, creating a more transparent and efficient market for MEV.
• CoW Swap: Uses batch auctions and settlement via DEX aggregation to prevent predictable on-chain arbitrage, protecting users from value extraction.
• Private Transaction Pools (RPC): Services like Flashbots Protect allow users to submit transactions directly to builders, hiding them from the public mempool and preventing frontrunning, though backrunning may still occur within the private order flow.

The most common form of backrunning, where a searcher profits from price discrepancies across decentralized exchanges (DEXs) after a large pending trade.

• Mechanism: A large swap on Uniswap is seen in the mempool. A backrunner calculates that this will move the price on Uniswap, creating a profitable arbitrage opportunity against another DEX like SushiSwap or Curve.
• Action: The backrunner submits a transaction with a higher gas fee, ensuring it is mined immediately after the target trade, capturing the arbitrage spread.
• Example: A large ETH→USDC trade on Uniswap V3 is pending. A bot backruns it with a complex route: buy the now-cheaper ETH on Uniswap and sell it at the still-higher price on SushiSwap.

Backrunning to trigger and claim the liquidation bonus from an undercollateralized loan position on lending protocols like Aave or Compound.

• Mechanism: A pending transaction (e.g., a price oracle update or a large trade) will push a borrower's health factor below the liquidation threshold.
• Action: The backrunner prepares a liquidation transaction. By setting a higher gas fee, they ensure their liquidation executes the moment the target transaction makes the position eligible, beating other liquidators.
• Key Term: This is often called liquidation racing. The backrunner earns a liquidation penalty (e.g., 5-10%) from the borrower's collateral.

Backrunning a large NFT purchase to buy undervalued NFTs from the same collection before the market reacts.

• Mechanism: A pending transaction to buy a high-value NFT (e.g., a Bored Ape) is detected. This signals increased demand and will likely raise the floor price (lowest listed price) for the entire collection.
• Action: The backrunner immediately purchases several NFTs listed at the current, lower floor price across markets like Blur or OpenSea, aiming to sell them later at a profit after the pending purchase completes and lifts the market.
• Risk: The strategy depends on the initial purchase completing and the market reacting as predicted.

A predatory form of backrunning (and frontrunning) that extracts value directly from a user's trade by manipulating liquidity around it.

• Mechanism: A large, naive DEX swap is identified in the mempool. The attacker executes two transactions:
  1. Frontrun: Buys the same asset first, driving its price up.
  2. Backrun: Sells the asset back immediately after the user's trade executes at the inflated price.
• Result: The user suffers worse execution (slippage), and the attacker profits from the artificial price movement they created. This is a classic Maximal Extractable Value (MEV) strategy.

Backrunning the creation of a new governance proposal to acquire voting power or influence the outcome.

• Mechanism: A governance proposal is submitted to a DAO (e.g., Uniswap, Compound). The proposal may include a snapshot of token holdings at a specific block to determine voting rights.
• Action: A participant who wants to influence the vote quickly acquires more governance tokens (e.g., UNI, COMP) in a transaction that executes just after the proposal is posted but before the snapshot block.
• Goal: To increase their voting weight or meet a minimum proposal threshold, affecting the democratic process.

Backrunning transactions that will update an oracle price, then taking positions that benefit from the new price.

• Mechanism: Many DeFi protocols use oracles like Chainlink or custom DEX-based price feeds that update periodically. A transaction that will trigger a price update (like a large trade on the reference DEX) is seen in the mempool.
• Action: The backrunner takes out a loan or opens a leveraged position on a lending/derivatives platform that will reprice based on the incoming oracle update. They profit from the known, imminent price change.
• Defense: Protocols use oracle delay mechanisms (e.g., time-weighted average prices) to mitigate this.

Backrunning exploits the public mempool. A searcher (or bot) monitors for a target transaction, like a large DEX swap that will move the price. They then programmatically submit their own transaction with a higher gas fee, ensuring it is included in the next block immediately after the target. This allows them to execute an arbitrage, liquidation, or other profitable action based on the new state.

Not all backrunning is malicious. The ethical line is often drawn between parasitic and useful extraction.

• Useful Backrunning: Provides a net benefit, like closing an arbitrage opportunity between DEXs, which improves market efficiency and liquidity.
• Parasitic Backrunning: Extracts value without providing a clear benefit, such as sandwich attacking a user's trade or frontrunning governance votes. This is viewed as a tax on users.

Backrunning directly impacts end-user security and experience.

• Financial Loss: Users suffer from slippage and worse prices due to sandwich attacks.
• Transaction Failures: Can cause user transactions to revert if market conditions change too drastically post-backrun.
• Network Congestion: Contributes to gas price auctions, increasing costs for all network participants.
• Centralization Pressure: The need for sophisticated MEV infrastructure favors large, professional operators over regular users.

Several protocol-level and user-level strategies exist to mitigate negative backrunning.

• Private Transactions: Using services like Flashbots Protect or Tornado Cash to submit transactions directly to builders, bypassing the public mempool.
• Commit-Reveal Schemes: Hiding transaction intent until it is too late to frontrun.
• Fair Sequencing Services: Proposed L2 solutions that order transactions fairly to prevent MEV extraction.
• Slippage Tolerance: Users setting lower, more precise slippage limits on DEX trades to avoid being sandwiched.

The legal status of backrunning is undefined and varies by jurisdiction. Regulators may view certain forms as:

• Market Manipulation: Similar to traditional finance offenses like spoofing or layering.
• Unauthorized Access: If it involves exploiting a protocol bug or access control flaw.
• Breach of Fiduciary Duty: For validators or block builders who prioritize their own backrun transactions. This uncertainty creates significant compliance risk for institutional participants.

Frontrunning is the related but distinct practice of submitting a transaction before a known pending transaction. It is often more damaging than backrunning, as it can preempt the original transaction, causing it to fail or execute at a worse price. Both practices are subsets of MEV and share similar mitigation techniques, but frontrunning is generally considered more aggressive and unethical.

The practice of placing a transaction to execute before a known pending transaction, aiming to profit from its anticipated price impact. This is often considered more disruptive than backrunning. Key characteristics include:

• Sandwich Attacks: A common form where a front-run and a back-run transaction are placed around a victim's trade.
• Priority Gas Auctions (PGAs): Bots compete by bidding higher gas fees to have their transaction ordered first.
• Negative Impact: Increases slippage and cost for the original user.

The decentralized waiting area where all broadcast, unconfirmed transactions reside before being included in a block by a validator or miner. It is the public data source that enables MEV extraction.

• Transparency: All pending transactions are visible, creating the opportunity for strategic ordering.
• First-Price Auction: The default mechanism where users bid gas fees to prioritize their transactions.
• Central Role: The mempool is the battlefield for transaction ordering strategies like front-running and backrunning.

The total value that can be extracted from reordering, including, or censoring transactions within a block, beyond the standard block reward and gas fees. Backrunning is a primary source of MEV.

• Sources: Includes arbitrage, liquidations, and DEX trades.
• Searchers: Independent network participants who compete to identify and capture MEV opportunities.
• Quantification: Historical MEV extraction has totaled billions of dollars across networks like Ethereum.

A class of protocols designed to establish a canonical, fair order of transactions before they reach the consensus layer, aiming to eliminate MEV opportunities from reordering.

• Pre-consensus Ordering: Transactions are ordered by a decentralized set of sequencers using a first-come-first-served or similar fair algorithm.
• Mempool Encryption: User transactions can be encrypted until ordering is decided, preventing front-running.
• Layer-2 Focus: Often implemented as a feature of optimistic or zk-rollups.

A proposed alternative transaction ordering mechanism where users pay for priority based on time urgency rather than competing in a pure gas auction. This aims to create a more efficient market for transaction ordering.

• Bid Structure: Users specify a priority fee and a deadline for their transaction.
• Mechanism: Transactions closer to their deadline are prioritized, reducing wasteful overbidding.
• Objective: Mitigates the "winner's curse" of PGAs and can reduce costs for non-urgent backruns.