Methods for preventing front-running in decentralized exchanges

Methods for preventing front-running in decentralized exchanges

Glossary

Term DefinitionsAddress An identifier for a node or host on a network, usually designed to be unique within the network. Blockchain A continuously growing list of records (i.e., blocks) linked and secured using cryptography. Cryptographic hash function A mathematical algorithm that maps data of arbitrary size to a fixed-size bit string, designed to be a one-way function. Digital Signature A mathematical scheme used to prove the authenticity of a digital message or document. Distributed Ledger A database shared and synchronized by consensus between multiple sites, institutions, or geographic regions. Smart Contract A computer protocol designed to digitally facilitate, verify, or enforce contract negotiation or performance. Order Ring A trading mechanism in which multiple orders of tokens are bought and sold in a closed loop, allowing each order to exchange its desired tokens without requiring the order of its counterparty. Relay A node that receives orders from a wallet or relay grid and maintains a public order book and transaction history. Ring Miner A relay node that generates an order ring by stitching together different orders. Wallet A software or interface that provides users with access to their tokens and a way to send orders to the network. Dual Authoring A security mechanism that involves setting up two levels of authorization for orders: one for settlement and one for mining.

Short Answer Questions

What is an order ring and how does it differ from traditional trading pairs?

What are the advantages of decentralized exchanges (DEX) over centralized exchanges?

What are the main risks faced by centralized exchanges?

What is front-running in decentralized exchanges?

What role does a ring miner play in the order ring matching process?

What is a margin split and how does a ring miner choose whether to charge a fee or a margin split?

How are orders scaled and why is scaling done?

What is the purpose of the designated token used in the Loopring protocol?

How does the dual authorization process help prevent front-running?

How is auth_private_key used in the dual authorization process?

Answer

An order ring is a trading mechanism where multiple orders of tokens are bought and sold in a closed loop, allowing each order to exchange its desired token without requiring a counterparty order from its trading pair. Unlike traditional trading pairs, order rings can improve liquidity and prices.

Decentralized exchanges (DEXs) allow users to maintain control of their private keys (assets), which reduces security risks, improves transparency, and potentially provides better liquidity.

The main risks faced by centralized exchanges include lack of security (due to users handing over their private keys to centralized entities), lack of transparency, and insufficient liquidity.

In decentralized exchanges, front-running is when someone tries to package their trade into the blockchain before someone else, usually by paying a higher transaction fee.

Ring miners generate order rings by stitching different orders together and earn fees or margin splits from the order rings.

Margin splits refer to the portion of the profit that ring miners receive from order rings. If the profit of the order ring is large enough, ring miners will choose margin splits; otherwise, they will choose to charge fees.

Order scaling refers to adjusting the size of an order based on the number of orders filled and cancelled and the current balance of the sender's account. Scaling is done to ensure that all trades in the order ring are successfully executed.

The designated token used in the Loopring protocol is used to pay fees, incentivize network participants, and implement protocol updates through decentralized governance.

The dual authorization process helps prevent front-running by requiring two levels of authorization for orders (one for settlement and one for mining). This prevents attackers from stealing orders or manipulating the order ring.

The auth_private_key is used to sign the hash of the order ring, which ensures that only entities with the corresponding auth_address can authorize the execution of the order ring.