Considering that Binance is the world’s largest cryptocurrency exchange platform, it’s safe to say they aren’t new to the scene. However, decentralized exchanges are beginning to increase in popularity, and Binance surely isn’t going to be left out of the party. All of this sounds great on the surface, but does Binance’s new decentralized exchange allow for front running?
What Is Front Running and How it Affects You
Front running is an illegal practice in the stock market where brokers receive insider information and cut in front of their clients. This same concept applies to the cryptocurrency market, where it’s possible that miners receive information before the general public, and make large buys or sells according to the details.
This is also a dangerous situation in the blockchain world because miners can pick and choose which blocks they’ll mine first. This means that in the case of decentralized exchanges, miners could decide to skip valid transactions and input their own- effectively cutting in line.
This revelation that miners can take advantage of their situation puts decentralized exchanges at risk. Since no central authority controls the order book, miners are left to validate blocks that contain a buy or a sell. It wouldn’t take much for a miner or a group of miners to go rogue within a decentralized exchange and form a crypto cartel that allows their transactions through first.
This practice affects all of us because we are at an immediate disadvantage. The only information we know is from the real-time price action on an exchange. We decide to buy or sell based on our emotions, such as FOMO and panic. When miners use insider information, such as the knowledge of a massive sell order, they can unload their coins first. After a malicious miner dumps their coins, we’re left to absorb either the price increase or decrease.
Binance’s Somewhat Decentralized Exchange
Binance is the world’s leading crypto exchange by trade volume and has decided to throw its hat into the ring of decentralized exchanges. This revelation sent shock waves throughout the crypto community because of its implications of massive volume moving towards DEXs. Although this is incredibly exciting, we can only imagine how easy the few miners that Binance Chain employs to secure and validate its network.
All eyes are going to be on Binance, especially since they’ll migrate BNB over to Binance Chain to be used as a native asset for the DEX. The excitement has been steadily growing as announcements showcase the new platform. Currently, Binance’s centralized exchange has grown immensely due to successful ICO sales, and this volume will surely move over to the new DEX.
Binance Chain is, so far, according to its GitHub, being validated by a small group selected from the Binance community. This revelation leads us to scratch our heads in wondering how decentralized the network really is. True decentralization requires a large number of nodes located around the world. Relying on a selected group sounds a whole lot like a centralized system.
Even though Binance claims they will increase the number of validators, the current state is a safe-haven for miners to play by their own rules. Since Binance will bring a large portion of users over to its DEX, miners could potentially front run the system under the cloak of large Volume.
The system could be taken advantage of since there are no makers and takers on the DEX. An algorithm will match the best buy and sell together, but only after these have been confirmed on the blockchain. Miners can potentially play the system and cut in line to place their order onto a block that they’ll accept themselves.
This situation could be potentially damaging for Binance’s DEX debut. Increasing the number of full nodes validating the system will be necessary once mainnet goes live to avoid this type of issue. Until we see Binance seriously considering the increase of validators, their network will remain in limbo between the centralized and decentralized realm.
From an even broader viewpoint, the success of a DEX is needed in the eyes of the crypto community. By gaining trust, DEXs could soon take the reigns from centralized exchanges and fulfill the promise of a future that’s trustless.