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Dima Dimenko is the co-founder of 111PG, a community of crypto protection-focused Ukrainian white hackers.
Hacking attacks can cause massive financial and reputational damages during the Initial Dex Offerings (IDOs). This is why protection against these types of attacks should be a priority of the token issuers. The preventative measures allow for minimizing the risks related to these attacks.
Understanding the main types of attacks allows for developing the most effective protection tools.
Why cyber security is the king
Cyber security focuses on stability by eliminating or preventing potential threats. At the same time, it differs from the other types of security based on the range of risks. Cyber security during the IDOs adds the financial component to the mix. Such an approach offers better protection to the parties involved.
The case of Polygonum-online shows the scale of potential dangers. The project requested protection from 111PG during its IDO on PancakeSwap. The security measures provided by 111PG stopped sniping bot attacks at [USD] 1.75 million. The other similar cases saved companies between [USD] 90-300 thousand.
Projects and companies undergoing IDOs may incur reputational losses. These losses could lead to significant operating disruptions along with losing future funding opportunities. A business could also worsen its relationship with its users.
Preventing these attacks means taking specific steps. Each step should address a particular type of attack.
Types of hacking attacks
It is possible to divide these attacks into three main categories. These categories are sniping bots, front-running bots, and sandwich attacks.
A sniping bot is a script seeking new listings on several or a single automated market maker (AMM). It can operate on any type of blockchain. Bots may target specific listings or every single one. The attacks differ based on their respective liquidity levels. The creators of these bots may run them or sell them to third parties. The bots need constant updates focusing on the respective measures.
Block 1 is the primary target of a sniping bot before the establishment of a trading pair. These bots can get in early because of the public nature of blockchain.
When the bots react to changes in liquidity levels, they get an unfair advantage relative to the token price. Hence, the bot gains the ability to inflate the price. The next step is to sell these tokens to the users.
Such a move causes a sharp decline in their price. The reasons are an excess supply on the market and a selling chain reaction.
While one sniping bot can be manageable, hackers deploy hundreds of them. The attack requires a centralized response. Hackers launch social media campaigns targeting users. The bots accuse projects undergoing IDOs of fraud against the users. The combined effect is damaging to the companies. It can prevent future IDOs and product launches.
Front-running bots are more sophisticated than sniping bots. They manipulate the order of transactions within a block paying higher gas prices. The exchange places them first in the queue for processing their transactions. The main reason is the inherent complexity of algorithms. The timing of the operations is also shorter.
The inherent complexity of these bots stems from the level of automation. It allows for determining the optimal transaction size in a millisecond.
Since information is available on a digital ledger, front running is legal. At the same time, the activity is illegal in the financial markets. Thus, it is up to the projects undergoing IDOs to improve security and protection. The measures should focus on the front-running bots.
Sandwich attacks combine the characteristics of the front-running and back-running attacks. Such an attack starts when a bot detects a large order for a specific token. Large orders affect the token’s price, especially when going through an AMM. During the sandwich attack, a bot places an order at a slightly higher gas price. The price level allows front running the other users placing bids. Bots can see prices because of the public nature of blockchain (slippage tolerance).
The second part of sandwich attacks includes sales of tokens. After inflating the token’s price, the bot initiates its sale at a margin. The attack damages users that buy tokens at higher prices and hold them through the decline.
Sandwich attacks hurt token issuers and trading communities. These attacks also cause reputational damages to the blockchain industry.
Protective and preventive measures
The good news is that companies have various protection and prevention tools. They support the projects during the IDOs. These measures focus on measuring spikes in liquidity and reacting to these changes. Like the scripts used by bots, protective solutions also rely on algorithms. These solutions support the timing of the response. The main challenge in implementing these measures and solutions is to avoid harm to the IDO. At the same time, it is important to maintain the convenience and speed of the transactions.
Another important challenge for the market today is general knowledge of the problem.
Unfortunately, developers of token projects are often not even aware of the danger that can await them during an IDO. An important component of our overall security is knowledge. So the problem of hackers and their impact on the market needs to be talked about more and more often.
This will help bring more experts into the cybersecurity solution and institutionalize cybersecurity in crypto as part of the system rather than the exception.
We’re all on the road to Web 3.0, but we’re still having trouble understanding what new challenges and hacking tricks are around the corner. The development of any technology, especially in the digital world, is always associated with the development of fraudsters in the field. And they often succeed much faster than everyone else. So being aware of a problem is already part of the solution.