Sandwich Attack from a Shariah Perspective

 

According to defi-planet.com, over 450,000 sandwich attacks occurred on Ethereum between May 2020 and April 2022, resulting in a total profit of 60,000 ETH for the attackers. While sandwich attacks do not directly lead to a complete loss of funds like rug pulls and other scams, they significantly limit the profit potential for traders using DEXs. The cost of performing sandwich attacks is often outweighed by the potential financial gain for attackers.

What is a Sandwich Attack? 

Sandwich attacks are a form of market manipulation targeting decentralized finance (DeFi) platforms using bots. These bots manipulate the market by "sandwiching" a victim's transaction between two of the attacker's own trades. This strategy enables the attacker to profit by exploiting price movements.

The attack unfolds in three key steps:

1. Mempool Monitoring:

When a trade is initiated on a DEX, it enters the mempool, a temporary holding area where miners or validators confirm transactions. Miners prioritize transactions with higher gas fees for greater rewards. Attackers scan the mempool, looking for potentially profitable trades, focusing on those with lower gas fees that can be outbid.

2. Execution of the Attack:

Upon identifying a target, the attacker creates two transactions:

• A "front-run" trade with a higher gas fee than the victim's
• A "back-run" trade with a lower gas fee

This setup ensures the attacker's first trade executes before the victim's, while their second trade follows it. This creates three transactions in the mempool, with the victim’s transaction sandwiched between the attacker’s transactions in terms of gas fee priority. This action effectively "outbids" the victim's intended purchase by driving up the price of the asset due to increased demand.

3. Profit Generation: 

The attacker’s transaction with the highest fee is prioritized, followed by the victim’s transaction. The victim’s trade then executes at the inflated price, resulting in them receiving less favorable terms (Higher price) than anticipated. Finally, after the victim's transaction is completed, the attacker sells their purchased tokens at this higher price, profiting from the difference.

Is Sandwich Attack Shariah compliant?

While the practice of sandwich trading may appear manipulative, it is crucial to distinguish between ethical considerations and explicit violations of Shariah principles. The act of influencing price for personal gain can be categorized as an unethical practice, as it might exploit vulnerable traders. However, the severity of this manipulation is often regarded as too minor to trigger noteworthy Shariah concerns. Just as in standard market transactions, traders experience price changes based on the buying and selling actions of others without inherently engaging in unlawful or unethical behavior, without them intentionally trying to manipulate the market.

Shariah issues may arise if this sandwich attack disrupt others' transaction. For example, sandwich trading results in scenarios where victims cannot purchase an asset due to being outbid by an attacker. Such situations undermine the principles of fair trading and mutual consent, leading to potential exploitation. When the victim is completely unable to acquire the asset, ethical concerns become paramount, necessitating reevaluation under Islamic law.

However, in the context of sandwich trading, while the victim may face a higher price, they still retain the ability to purchase the asset. The market allows users to pay higher transaction fees to prioritize their trades. Even without the presence of sandwich attack bots, price fluctuations can occur due to normal buying and selling activities. Therefore, since the victim can still participate in the asset acquisition process, the practice does not inherently violate Shariah principles and cannot be considered as interrupting others' buying and selling contracts.

Strategies to Mitigate Risks 

Mitigating risks associated with sandwich attacks is possible, and it requires proactive strategies and vigilant practices within the DeFi ecosystem.​ By employing techniques such as low slippage settings, flashbot transactions, limit orders, and conducting thorough due diligence, traders can significantly reduce their vulnerability to exploitation. Maintaining an informed and adaptive approach within the rapidly evolving world of decentralized finance will contribute to safer trading experiences.

Conclusion

In summary, while sandwich trading involves elements of price manipulation that may be considered unethical, it does not fundamentally raise significant Shariah concerns. This practice mirrors traditional buying and selling mechanisms, where market fluctuations are a natural part of trading. As long as victims still have the opportunity to purchase assets—even at varied prices—and there is no disruption of others' buying and selling contracts, the actions associated with sandwich trading align more closely with permissible trading practices under Islamic law.