Oracles are a vital aspect of DeFi protocols — their role of providing off-chain data that is inputted on-chain to enable the smooth running of smart contracts makes them very important.
In its simple description, Oracles connect blockchains to each other with an aim of cross-communication and exchange of necessary data. This data can take the form of live aggregation of asset prices that need to be fed into DEXes.
As important as oracles, that there has been a spike in the number of attacks launched against oracles. Due to 41 of these attacks also known as Oracle Manipulation Attacks, DeFi protocols 2022 lost $386.2 million according to data from Chainalysis.
Dynamics of Oracle Manipulation Attacks
While the majority of attacks initiated on DeFi protocols explore a weak point or a vulnerability in the structure, Oracle Manipulation Attacks are launched differently. Attackers manipulate the prices of assets coming from oracles by attacking the oracles feeding DeFi protocols.
In addition, Chainalysis noted that this attack can also involve the use of large amounts of cryptocurrency to quickly trade tokens with low liquidity on certain DeFi protocols so that the price can be altered but is not reflected in the open market.
In a situation where the attacker lacks enough money to trade the token, they use flash loans and when the price of the token is high enough, “the attacker can then exchange their artificially inflated holdings for other tokens with greater liquidity and a more consistent value”. For others, instead of exchanging the token, they borrow money while using the tokens as collateral, with no plans to pay back.
Avraham Eisenberg argues that oracle manipulation attacks are legal
There is a debate in the crypto industry arguing that Oracle manipulation attacks are legal and trader Avraham Eisenberg, who used the procedure on the Mango Markets protocol, a DEX on Solana, is one of the most popular proponents of this.
Avraham argues that he sees the procedure he initiated on the Mango Markets as a “profitable trading strategy” which made the protocol to lose $117 million during the attack in October 2022. Since the attack, he has been bold to appear on shows such as Laura Shin’s popular Unchained Podcast where he talked about his stance on such attacks.
In response to all of Avraham’s claims, charges have been filed against him by the SEC and CFTC for market manipulation. Chainalysis also noted that Mango Markets sued the attacker for engaging in unlawful on its platform and with the Mango DAO.
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