Oracle manipulation in decentralized finance poses a significant threat to the integrity of financial transactions and protocols. This manipulation can occur when attackers exploit vulnerabilities in the price feed mechanisms provided by oracles, which are crucial for determining asset prices and executing smart contract logic accurately.
One method attackers use involves leveraging flash loans within automated market makers (AMMs) like Uniswap.
Oracles are external data sources that supply information to smart contracts on the blockchain, such as asset prices, market data, or real-world events. These data inputs are crucial for executing smart contract logic accurately within DeFi applications. Oracle manipulation attack occurs when malicious actors intentionally alter the price feed provided by an oracle.
The Features of Secure an Oracle
Secure oracles are essential in defending against attacks by sourcing price data from a wide array of trading environments, ensuring comprehensive market coverage, and reducing manipulation risks. By aggregating data from multiple sources, they provide accurate and reliable price feeds that reflect true market values. Their decentralized structure eliminates single points of failure and enhances resistance to tampering.
Regular audits and security assessments by independent third parties identify vulnerabilities and ensure adherence to best practices, maintaining the system’s reliability and security. These comprehensive measures collectively protect the DeFi ecosystem from manipulation, ensuring user confidence and trust in Oracle services.
To further safeguard against attacks, secure oracles implement economic incentives for accurate reporting, such as staking mechanisms and reward structures, aligning the interests of oracle operators with those of the users. Redundancy and failover mechanisms ensure continuous operation and data availability, allowing secure oracles to switch to alternative sources if one fails.
The Flash Loan Attack Steam
Flash loans enable borrowers to borrow a large sum of assets temporarily without collateral, provided they repay the loan within the same transaction. This capability allows for rapid and substantial trading actions within the decentralized ecosystem. By executing a series of strategically timed trades using a flash loan, attackers can influence the price of a token within an AMM. These trades can create artificial demand or supply shocks that temporarily distort the asset's price before the oracle updates its price feed.
The critical aspect of this manipulation strategy is timing. Flash loans allow attackers to execute their trades and manipulate AMM prices swiftly, often before the oracle has a chance to fetch updated market data. As a result, the oracle may temporarily reflect the manipulated price rather than the true market value of the token. DeFi protocols relying on these oracles can then make decisions based on this distorted data, such as prematurely liquidating assets or executing trades at incorrect prices.
Mitigation Strategies for Oracle Price Manipulation
Oracle Diversification: By using multiple oracles and comparing their data, DeFi protocols can detect discrepancies and outliers. This approach helps filter out manipulated data, ensuring that the price feeds used in smart contracts are accurate and reliable.
Time-Weighted Average Prices (TWAP): TWAP is an effective method to smooth out short-term price fluctuations by averaging prices over a specified time period. This reduces the impact of rapid manipulations on the price feed, providing more stable and predictable pricing information for smart contract execution.
Circuit Breakers: These mechanisms are designed to pause trading or borrowing activities in DeFi protocols when abnormal price movements are detected. Circuit breakers help prevent attackers from exploiting manipulated prices during periods of high volatility, thereby safeguarding the integrity of the protocol and protecting user assets.
Avraham Eisenberg exploited a vulnerability in Mango Markets, a decentralized finance platform on the Solana blockchain. He manipulated the price of the MNGO token by taking out a large position and then buying up a significant amount of MNGO to artificially inflate its price. This inflated price allowed him to borrow and withdraw $114 million worth of assets from the protocol, leaving Mango Markets with a massive deficit.
bZx Protocol Exploit (2020)
The bZx protocol suffered multiple attacks due to oracle price manipulation. In one instance, an attacker used a flash loan to manipulate the price of a token on the Kyber and Uniswap exchanges. This manipulated price was then fed into the bZx protocol's oracle, allowing the attacker to take out an undercollateralized loan and profit from the discrepancy. The total losses from these attacks amounted to nearly $1 million.
Harvest Finance Exploit (2020)
Harvest Finance, a yield farming protocol, was exploited for approximately $24 million. The attacker used flash loans to manipulate the prices of stablecoins on Curve Finance, which were then used by Harvest Finance's oracles. This manipulation enabled the attacker to withdraw significantly more funds than deposited, resulting in substantial losses for the protocol.