Eliminating Sandwich Attacks with the Help of Game Theory - Lioba Heimbach
Channel: Protocol Labs
Date: 2022-05-17

Bio: Lioba Heimbach is currently pursuing a Ph.D. in the Distributed Computing Group at ETH Zurich. She is particularly interested in both the analytical and empirical analysis of decentralized exchanges. Before starting her Ph.D., she received both her Bachelor's and Master's degrees from ETH Zurich and spent a semester at the Chinese University of Hong Kong during her Master's studies.

Abstract: Predatory trading bots lurking in Ethereum’s mempool present invisible taxation of traders on automated market makers (AMMs). AMM traders specify a slippage tolerance to indicate the maximum price movement they are willing to accept. This way, traders avoid automatic transaction failure in case of small price movements before their trade request executes. However, while a too-small slippage tolerance may lead to trade failures, a too-large slippage tolerance allows predatory trading bots to profit from sandwich attacks. These bots can extract the difference between the slippage tolerance and the actual price movement as profit. 

In this work, we introduce the sandwich game to analyze sandwich attacks analytically from both the attacker and victim perspectives. Moreover, we provide a simple and highly effective algorithm that traders can use to set the slippage tolerance. We unveil that most broadcasted transactions can avoid sandwich attacks while simultaneously only experiencing a low risk of transaction failure. Thereby, we demonstrate that a constant auto-slippage cannot adjust to varying trade sizes and pool characteristics. Our algorithm outperforms the constant auto-slippage suggested by the biggest AMM, Uniswap, in all performed tests. Specifically, our algorithm repeatedly demonstrates a cost reduction exceeding a factor of 100.

Related work: 
https://tik-db.ee.ethz.ch/file/cd90e36cda8a9d21029fb91381ff5ae4/bmhdxbzywfgjpxqwgrzpkfkhhvnwgtpf.pdf
---
Make sure to give our Twitter account a follow! @ProtoResearch https://twitter.com/ProtoResearch

Interested in hearing about future talks, funding opportunities, and more? Sign up for our mailing list: 
https://mailchi.mp/protocol/research-newsletter-signup

To suggest a talk topic or speaker, or if you are interested in giving a talk yourself, please email us or open an issue at github.com/protocol/research/issues/new/choose

Want to learn more about Protocol Labs Research? Visit our website: 
https://research.protocol.ai/

Interested in working at Protocol Labs? Check out our job board: 
https://boards.greenhouse.io/protocollabs