Exploit of KyberSwap’s Concentrated Liquidity Feature Results in $46 Million Loss

On November 23, 2023, the decentralized finance (DeFi) space was shaken by a meticulously planned exploit of KyberSwap, a leading decentralized exchange (DEX). The exploit, which Doug Colkitt, creator of Ambient exchange, characterized as “the most complex and carefully engineered” he had ever seen, resulted in a loss of approximately $46 million.

To grasp the exploit’s intricacy, one must first understand ‘concentrated liquidity.’ This feature, common across DEXs like KyberSwap, Uniswap, and Ambient, allows liquidity providers to allocate their assets within specific price ranges, enhancing capital efficiency. However, this mechanism also introduces unique vulnerabilities, as exploited in this incident.

The attacker’s strategy revolved around the Ethereum ETH/wstETH pool on KyberSwap. Starting with a flash loan of 10,000 wstETH (worth about $23 million), the attacker manipulated the pool’s price dynamics. By injecting 2,800 wstETH ($6 million) into the pool, they significantly skewed the ETH to wstETH price ratio. This action moved the pool’s price to a range with virtually no existing liquidity, setting the stage for the exploit.

With the pool’s price artificially altered, the attacker then minted a small amount of liquidity in a narrowly defined price range. Following this, they executed two crucial swaps. The first swap involved selling a large quantity of wstETH for a minimal amount of ETH, drastically pushing the price down. The second swap reversed this, buying back a more significant amount of wstETH for a fractionally higher amount of ETH. This series of transactions should have, under normal circumstances, resulted in negligible net gains due to the self-contained nature of the trades.

However, due to a mathematical flaw in KyberSwap’s contract, these trades did not net out as expected. The contract failed to accurately account for the liquidity changes during these swaps, leading to a misrepresentation of the available liquidity. This flaw enabled the attacker to extract far more wstETH than they initially deposited, effectively creating an “infinite money glitch.”

The critical point of failure was the contract’s handling of the updateLiquidityAndCrossTick function. During the first swap, this function, which adjusts the curve’s liquidity value based on the LP range positions at a given price tick, was not invoked correctly. As a result, the pool’s liquidity was not accurately updated, allowing the attacker to exploit this oversight to their advantage. The precise manipulation of swap quantities and prices indicates a deep understanding of the underlying contract mechanics by the attacker.

This incident has profound implications for the DeFi ecosystem, particularly concerning the security of smart contracts. While Colkitt noted that this exploit is specific to Kyber’s implementation and does not necessarily pose a threat to other DEXs with concentrated liquidity, it underscores the need for more rigorous security measures and vulnerability assessments in DeFi protocols. The precision and sophistication of the attack also highlight the evolving nature of threats in the DeFi space.

The KyberSwap exploit serves as a stark reminder of the complexities and vulnerabilities inherent in DeFi. It underscores the importance of continuous security audits and the need for the DeFi community to remain vigilant against such sophisticated attacks. As DeFi continues to grow and evolve, so too must the security measures that protect its infrastructure and users.

Image source: Shutterstock


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Comments On Pantera Capital’s Predictions For The Crypto Market In 2022

One of Pantera Capital’s investors, Paul Veradittakit, was brave enough to make predictions for this year in the tumultuous world of crypto. Even though we applaud the courage, we’re going to poke holes in them. Because this is the Internet and that’s what we do here. To be clear, the author went through 2021 biggest trends and extrapolated them into the future. Which is a safe enough technique.  

Related Reading | Sports NFT Marketplace Lympo Suffers An $18.7 Million Hack

Considering Pantera defines itself as the “first U.S. institutional asset manager focused exclusively on blockchain,” you know Veradittakit didn’t even mention Bitcoin. The following is a purely crypto affair. It’s also worth noticing that the biggest criticism that Web3 gets is that it’s funded by venture capital and they’re the ones who will ultimately benefit from it. And, well, that’s just what Pantera is and does.

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In any case, let’s explore Veradittakit’s ideas and predictions.

Pantera On L2s and Rollups

Surprisingly, the article starts by throwing Ethereum under the bus. According to Veradittakit, all the action will be on L2s. Those grew tremendously in 2021, and the Pantera investor considers them essential to Ethereum’s scalability. 

“As mainstream adoption of crypto continues to grow, Ethereum’s network congestion will only become worse, exacerbating its problems with latency and fees. Rollups are critical to sustaining the growth of Ethereum by ensuring that compute infrastructure is highly scalable, allowing users to interact with dApps with similar or even better expectations around usability as with traditional web apps.”

Reading between the lines, this prediction also says that Ethereum is not going to release any of its network upgrades this year. Which sounds about right.

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Pantera On Non-Ethereum/Bitcoin Chains

This prediction refers to the battle of the L1s, or the supposed Ethereum killers. The Pantera investor is obviously partial to one in particular:

“Recent activity in the Solana community, including the launches of massive funds for decentralized social media and gaming, suggests that the ecosystem will continue to grow immensely in the coming year.”

First of all, you can’t have “decentralized social media and gaming” in a centralized platform like Solana. Second, Veradittakit forgets to mention Solana’s constant technical problems and outages. Make of that what you will. 

Another tendency the author mentions are bridges, “which enable interoperability between vastly different networks,” which he considers will “accelerate the growth of non-Ethereum ecosystems.” Or, to put it more bluntly:

“Overall, these advancements in cross-chain infrastructure will accelerate the speed at which alternative layer one chains gain traction, fostering the development of a truly robust, diverse multi-chain crypto ecosystem.”

What the Pantera investor really means is that all other L1s will keep leaching on Ethereum. Which sounds about right.

SOLUSD price chart - TradingView

SOL price chart on FTX | Source: SOL/USD on TradingView.com

Veradittakit On Composability and Web3

This theme ties with the previous one. But the Pantera investor gets into a very interesting topic:  

“Decentralized identity projects, which allow users to maintain full, more precise control over personal data and reputation, enabling use cases around un-collateralized loans, know your customer (KYC) rules, and more. In 2022, we’ll see more projects expand the scope of on-chain ownership, allowing users to have full, functional control over their identity and holdings in the digital world.”

One thing’s for sure, the world needs “a single login across all services”. No one can handle the number of passwords we’re supposed to remember. This is a real problem. In the article, however, the author focuses on Ethereum-based solutions. We would like to mention that there’s an alternative that uses the Lightning Network. And, you know, that runs over a network that’s actually decentralized.

Pantera On Expansion of NFTs 

This is his least controversial take. Veradittakit thinks “NFTs will continue to grow immensely in popularity through the coming year”. He elaborates:

“NFT projects in 2022 will show substantially more diversity in use cases and will reconfigure how we interact with and think about ownership of digital media more broadly.”

However, paraphrasing Vitalik, NFTs have to live through a bear market before they can be considered a success. Is there going to be a bear market in 2022? Probably not. So, Pantera’s prediction stands.

Veradittakit On Decentralized Autonomous Organizations

This prediction  is also fairly uncontroversial: 

“Given their heightened prominence, I expect to see DAOs become a mainstream vehicle for online organizing and collective action, helping individuals across the globe get actionably involved with causes they care about.”

And the Pantera investor follows it up with this one:

“As DAO operations grow in complexity, I expect to see even more projects building out DAO tooling and infrastructure in 2022.”

More DAOs and tools to manage them? That sounds about right.

Related Reading | Solana: A Quick Review And Look Ahead

Pantera On DeFi Security

This prediction starts with chilling stats:

“More than $610 million were stolen through DeFi exploits in 2021 (a staggering eightfold increase from $77 million in 2020), and an additional $704 million in funds were stolen and then later returned by white hat hackers, like those behind the $600 million PolyNetwork exploit.”

Considering 2021 was the year of DeFi, this should come as no surprise. Criminals follow success and attention. In any case, look at those numbers and extrapolate them to what they would be if DeFi achieves mainstream status.

“In 2022, I expect to see security become a tremendous focus for DeFi projects, and anticipate several more projects launch around better smart contract auditing, precise runtime monitoring, and consumer protections.”

The question here is, is that enough? Or are smart contracts a security risk by definition? Will anyone be able to build an unhackable DeFi protocol? Who will win this race?

Featured Image by JohannaIris in Pixabay | Charts by TradingView


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