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It looks like we just saw our latest DeFi exploit / attack, but this one was very different from all the others.
Bitcoin, Ethereum, and the rest of the cryptocurrency market all spiked to the downside on Wednesday evening as buying pressure finally eased. The current theory is that since it is Thanksgiving, the buying pressure from institutional pressures has been temporarily taken offline.
Either way, BTC fell 14% from its highs while ETH suffered heavy losses of 18%.
As the market began to drop, users began to notice that Ethereum’s transaction fees had started to rise by around 1,000 percent. The lawsuit was cited as the cause of the liquidations, which refer to how on-chain loans are regularly liquidated due to price tightening.
This seems correct, but the liquidations were not natural: according to the tracker DeFi LoanScan, the past day loans of about $ 100 million were liquidated on Compound. Analysts claim it was the result of an oracle manipulation attack.
Compound is a decentralized lending platform where users can merge assets such as Wrapped Bitcoin, Ethereum and stablecoin and withdraw other coins as a loan.
What are oracles?
In cryptocurrency, oracles are a technology that allows smart contracts to talk to data sources that are not based on a blockchain.
The most popular type of Oracle is Chainlink, which is integrated into countless DeFi and blockchain applications.
It is often used to provide price feeds for DeFi platforms, such as decentralized lending platforms, decentralized exchanges, etc.
Compound appears to be using its own oracular technology, which takes coin prices in centralized exchanges, then re-enters them into its own protocol to determine if liquidations need to be made, etc.
This technology has apparently been exploited during the recent market decline.
The exploit
While it made sense that Compound was supporting liquidations during the lower decline, things moved much faster on the platform than Aave and MakerDAO, other DeFi protocols through which users can borrow.
LoanScan reports that MakerDAO has liquidated a collateral worth less than $ 1 while dYdX made $ 7 million. Compound’s $ 100 million day clearly stands out.
As noted by many on Twitter, what apparently 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 be watched by oracles due to the lack of affiliate manipulation / spoofing of exchanges.
Trading DAI at $ 1.30, at least in the oracle’s mind, meant that there were a number of users who had borrowed in DAI were under the liquidation ratio. Their positions were subsequently liquidated to ensure that suppliers weren’t 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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