Seeming oracle attack causes $100m in Ethereum DeFi liquidations


It appears we just saw our latest DeFi exploit/attack, but this one was much different than all the rest.

Bitcoin, Ethereum, and the rest of the crypto market spiked dramatically lower on Wednesday evening as buying pressure finally abated. The running theory is that due to it being Thanksgiving, the buying pressure that had come from institutional pressures was temporarily taken offline.

Whatever the case, BTC dropped 14 percent from its highs while ETH sustained heavy losses of 18 percent.

Chart of BTC’s price action over the past few days. Source: BTCUSD from TradingView.com

When the market began to drop, users began to notice that Ethereum transaction fees had begun to spike by approximately 1,000 percent. Liquidations, referencing how on-chain loans are regularly liquidated amid price crunches, were cited as the cause.

This appears to be correct, but the liquidations were not natural: according to DeFi tracker LoanScan, approximately $100 million worth of loans were liquidated on Compound in the past day. Analysts purport that it was a result of an oracle manipulation attack.

Compound is a decentralized loaning platform where users can pool assets such as Wrapped Bitcoin, Ethereum, and stablecoins and withdraw other coins as a loan.

What are oracles?

In crypto, oracles are a technology that allows smart contracts to speak with data sources that aren’t based on a blockchain.

The most popular type of oracle is Chainlink, which is integrated into countless DeFi applications and blockchains.

It’s most often used to provide price feeds for DeFi platforms, such as with decentralized loan platforms, decentralized exchanges, etc.

Compound appears to use its own oracle technology, which takes the prices of coins on centralized exchanges, then feeds it back into its own protocol to determine if liquidations need to be made, etc.

This technology was apparently exploited during the recent market drop.

The exploit

While it made sense that Compound sustained liquidations during the drop lower, things moved much faster on the platform than it did on Aave and MakerDAO, other DeFi protocols through which users can obtain loans.

LoanScan reports that MakerDAO liquidated under $1 worth of collateral while dYdX did $7 million. Compound’s $100 million day clearly stands out.

ethereum collateral
LoanScan data

As noted by many on Twitter, what seemingly happened was that someone/natural market pressures pushed the price of DAI/USDC to 1.30 on Coinbase. Coinbase is often used as an exchange to watch by oracles due to the lack of manipulation/spoofing affiliated with the exchanges.

DAI trading at $1.30, at least in the mind of the oracle, meant that there were a number of users that took out loans in DAI were under the liquidation ratio. Their positions were subsequently liquidated to ensure that suppliers would not be underwater.

This is still a developing story with many moving parts. CryptoSlate will update this article when more is known about the situation.

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