ICO Shenanigans: How some miners rig the ICO game by "frontrunning" network transactions

As the ICO fever does not seem to abate any time soon, more and more opportunistic and unethical mining pools may be trying to take advantage of the situation at the expense of ICO participants and the network itself. We must be made aware of what is causing network congestion on Ethereum during ICOs, and which pools are abusing/misusing their Hashpower for personal gains.

Below is an excerpt from an interesting article on the topic. Let me know what you think in the comments below.

"Anticipating a sell-out initial coin offering (ICO), a crypto-enthusiast is patiently waiting to send a purchase over the blockchain when the ICO begins.

As soon as it does, he broadcasts the transaction over the network, but it doesn't go through. He tries again. And again. Still nothing.

On Reddit, other users are furious. They lament. Why weren't their transactions being picked up? Project corruption? Bigger whales?

New research suggests the biggest threat to a fair token sale may be miners.

Tasked with organizing the transactions that go into each block, miners, it seems, have found themselves in a powerful position in regards to ICOs – one that could be quite lucrative for them at the expense of users.

Defining the problem

The practice is called "frontrunning," and it's alleged to occur when mining pools detect large volumes of transactions being used for the purchase of new tokens. Rather than treat the transactions as any other, they instead cut the line.

And in ICOs where demand is high, transaction ordering can mean the difference between a successful bid at retail prices, and being stuck with a higher price tag later. That's because if the token sells out while there's still demand, the miners can then resell the tokens on a secondary market at a premium.

It's an ingenious hack, but a tough one to pull off.

Everything has to be just right, the ICO can't sell out in one block, and it can't have too long a time frame for buys, either, like tokens that haven't garnered much interest and so don't sell out at all. The sweet spot: selling out in 20 to 30 blocks.

And that's not all. Not only does the mining pool have to reorganize transactions so its own are in the next block to be found, it would also have to win the block race to verify that block. Because if they didn't, the mining pool that verified the block would be able to see the reorganization and call fraud.

It's risky. But yet, there's evidence, or at least, speculation that it's happened.

In June this year, it was alleged that China-based F2Pool created addresses to purchase tokens from the Status ICO, and that those addresses were the only ones mined in a block published by the pool." 

(Source: https://www.coindesk.com/submarine-sends-inside-ic3s-plan-to-clamp-down-on-ico-cheats/)

Full article available at https://www.coindesk.com/submarine-sends-inside-ic3s-plan-to-clamp-down-on-ico-cheats/

Author:  Bailey Reutzel