Comparing Price Manipulation Attacks Across Layer 1 and Layer 2 Decentralized Exchange Platforms

As the popularity of decentralized finance (DeFi) increases, Layer 1 (L1) exchange platforms, such as Ethereum, have become more vulnerable to front-running attacks and price manipulation. Evidence of these automated exploits can be found on both Ethereum and Polygon, a novel Layer 2 (L2) protocol introduced to rectify L1’s scalability problems. Given each network’s differing validation policies, this study aimed to contrast attacks on L1 to L2 networks using R and economic modeling.

Analyzing transaction history from one large liquidity pool pair allowed us to spot patterns in artificial inflation and identify where attacks occur the most. On average, attacked traders lost 0.27% of their initial transaction value to front-runners on the Ethereum pool compared to only 0.04% on Polygon. In aggregate, bots profited up to twenty-six times more on L1 than L2.

This study provides empirical evidence supporting L2’s front-running security and scalability benefits over L1.