When I first heard about uniswap, the new decentralized token exchange for ERC20 tokens, I was immediately interested. After all, who wouldn’t want to be one of the first people able to buy newly issued tokens? But what if there is a way I can get an advantage over other buyers and guarantee my spot as the first person to buy these newly issued tokens? While it’s not possible to do this with any type of 100% certainty (aside from buying up every single available token), front-running bots on uniswap offer a great opportunity. This article will explain how using a front run bot on uniswap can earn me big profits from being the first to buy tokens when they launch.
What is front-running?
Front-running in the context of cryptocurrency exchanges simply means putting in orders earlier than other orders, allowing me to get priority when buying/selling when the price is changing (due to someone else’s order). In traditional financial markets, it can be a criminal offense where insiders use their knowledge of future trades to benefit themselves at the expense of others. In decentralized exchanges like uniswap, there aren’t people with any special privilege acting as an intermediary between buyers and sellers, so it’s something that cannot happen. Front running isn’t a concern or a danger on decentralized exchanges like uniswap since all smart contracts follow a publicly visible set of rules that don’t change based on outside information.
It is only possible to front-run on uniswap when placing orders in advance of an order someone else places since the price of the order I am placing depends on their order. However, since anyone with enough liquidity (i.e., ETH) can act as a market maker with uniswap, some people can front-run that don’t have any special privileges or inside knowledge. These types of front runs are also called “liquidity-sniping.”
How is this done?
Since my trade is automatically submitted when the other person fills theirs, if I submit my own order before theirs, I may get priority over them and be able to fill their orders before they can immediately. This is a big deal because I get priority to buy a token when it first becomes available. It also means that if the token price starts going up on other exchanges, my order will go through at whatever price I specified before theirs does. In order to guarantee myself priority on new orders, I need to submit my order in advance and use a front-run bot for this purpose. So how does using a front-run bot on uniswap earn me big profits from being the first to buy tokens when they launch?
Since it is possible to be the first person to submit a new order on uniswap, I can set up a market maker bot that places orders in advance for whatever token is coming next. This means I will always want to make sure my bots are turned on and ready since new tokens come out (and sell out) all the time, and I don’t want to miss out! Since people like myself who use these front-run bots profit from this price difference, we’re willing to pay more than the average user for this priority access.
The people who buy the tokens at a higher price will then sell them to those who bought them later at a lower price. This means that if I place big, advanced orders on uniswap and use the ETH I have earned to buy new tokens as they come out, I can earn extra ETH passively since uniswap has automatic liquidity sharing. If other buyers submit their trades after MINE, I will be able to sell my token right away instead of waiting for them (and hoping they don’t cancel or change their minds). I can also immediately re-buy the same number of tokens without having to worry about another trader sniping MY order and buying all available tokens before me.
If there is sufficient volume in the market, setting up front-running bots on uniswap can be very profitable, especially if I have an automated algorithm that does this 24/7. I will automatically get extra ETH in my account from the people who bought at a higher price! Since no one knows which tokens will launch next, it’s not possible to set up front-run bots before the token goes live, so I have to keep them turned on for as long as possible to catch all opportunities. As soon as someone else places an order, I should disable my bot (or pause it) since it would interfere with their trade and prevent me from getting priority access.
The more advanced my bot, the better I will be able to predict the price changes and catch opportunities earlier than other users. Since uniswap has an open order book, if I can predict what people will want to buy before they do, I can ensure all of their orders will go through until everyone else catches on and places their orders. This means that as long as several traders are using this strategy, it effectively becomes a race to see who can submit their trade first. The trader with the fastest algorithm wins! If there are not enough people using these bots, I may be able to set up my own front-running algorithm that beats everyone else, giving me a great advantage.
Understanding the basics of how these bots work will help me use them effectively. Since it is possible to lose money on uniswap if there are no trading opportunities or insufficient volume in the market, front-run trading can only be profitable if done correctly.
Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.