The Dangers of Oracle Manipulation in Blockchain: A Deep Dive

Introduction

Oracle manipulation has emerged as one of the most significant threats to the security and stability of DeFi protocols in the blockchain ecosystem. This form of attack, which centers around the manipulation of data provided by oracles, has led to substantial losses for DeFi protocols and their users. This article provides an in-depth understanding of oracle manipulation attacks, including their nature, recent examples, and strategies to avoid them including smart contract audits and real-time fraud prevention.
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What are Oracles and How Are They Used in Blockchain?
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Oracles are crucial elements in the blockchain ecosystem, particularly in the DeFi space. They serve as bridges between blockchain protocols and the outside world, providing essential data from external sources that smart contracts need to execute their functions. These external sources can include price feeds for assets, data from web APIs, and other real-world information.

Since blockchains like Ethereum are deterministic and have no inherent way of accessing real-world data, oracles play a crucial role. For instance, a smart contract for a decentralized lending protocol needs to know the current price of assets to correctly calculate loan amounts, interest rates, and liquidation thresholds. This information is typically provided by oracles.
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What is an Oracle Manipulation Attack?

Oracle manipulation attacks occur when bad actors manipulate the data provided by oracles to benefit themselves at the expense of other protocol users. Typically, an attacker will try to influence the data source that an oracle relies on, causing the oracle to feed inaccurate information into the smart contract. This can lead to a wide variety of undesired outcomes, including incorrect loan calculations, improper token swaps, or flawed governance decisions.

An interesting aspect of oracle manipulation attacks is that they often leverage the very mechanics of the DeFi protocol and its associated smart contracts. This means that technically, the protocol behaves as designed, even though the outcomes are undesirable due to manipulated inputs.
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Recent Oracle Attacks

One notable oracle manipulation attack occurred in 2022 on the DeFi protocol Mango Markets, a DEX on the Solana blockchain. The attack, led by Avraham Eisenberg, resulted in a loss of $117 million in assets from the protocol. Eisenberg initiated the attack with $10 million USDC, spread across two separate accounts at Mango Markets. He used one account to short a large quantity of the protocol's governance token (MNGO) while the other account took the opposite side of the trade, buying the same amount with leverage. This manipulation significantly boosted the asset's price, enabling Eisenberg to borrow against his artificially inflated MNGO holdings and remove virtually all of the assets held by Mango Markets.

In another instance, an attack on bZx, a lending protocol on Ethereum, exploited a flaw to take an under-collateralized position. This manipulation resulted in approximately $370k profit for the attacker and approximately $620k of equity loss in the bZx lending pool. The attacker began by borrowing 10,000 ETH, then made a series of complex transactions involving other DeFi protocols like Compound and Kyber. These transactions manipulated the price of WBTC (Wrapped Bitcoin) and resulted in a significant profit for the attacker.
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How to Avoid Oracle Manipulation Attacks

Preventing oracle manipulation attacks involves a combination of strategies:
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1. Use Multiple Oracles

By using multiple oracles from different data sources, DeFi protocols can reduce their reliance on a single data point. If one oracle is manipulated, the others can provide a check and balance. This is often referred to as a decentralized oracle network.
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2. Time-Weighted Average Prices (TWAPs)

‍TWAPs are a common method for mitigating oracle attacks. They smooth out price fluctuations over a given period, making it more difficult for manipulative trades to have a large impact on the price used by the smart contract.
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3. Consider Using Decentralized Oracle Networks

‍Decentralized oracle networks like Chainlink provide reliable and secure price feeds. These networks aggregate data from numerous high-quality data providers, which reduces the risk of price manipulation.
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4. Implement Rate Limiting

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‍Rate limiting can reduce the impact of flash loans by limiting the amount of changes that can occur within a certain time period. This makes it harder for a large, sudden transaction to manipulate prices.
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5. Slippage Protection

Implementing slippage protection can prevent transactions that would cause a large price impact from being processed.
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6. Consider Oracle Redundancy

In case one oracle fails or provides incorrect data, having backup oracles can prevent manipulation and improve reliability.
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7. Thorough Testing

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‍Regular and comprehensive testing, including stress testing and simulation of possible attack scenarios, is crucial to ensuring the security of your smart contract.
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8. Smart Contract Audits

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‍Regular smart contract audits by reputable firms such as HYDN can identify potential vulnerabilities and recommend fixes.
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9. Real-Time Fraud Prevention

Here at HYDN, we have built real-time fraud prevention for DApps. HYDN Prevent reviews every transaction that interacts with your smart contracts and can block malicious ones preventing catastrophic losses. For more info or to join our free launch period head over to the HYDN Prevent page.

HYDN Prevent is the only product of its kind, designed to stop blockchain attacks before they happen. It reviews every transaction that interacts with your DApp’s smart contracts, identifying and informing you of malicious ones. This allows your DApp to decide whether to accept or reject the transaction, ensuring your assets remain secure and your reputation intact.

The product boasts a comprehensive suite of detectors covering an extensive array of common attack vectors such as Oracle Manipulation, Reentrancy Attacks, Phishing Attempts, Contract Impersonation, Role Changes, and more. It is capable of detecting and thwarting almost all attacks in real-time, potentially saving your DApp millions.

In addition to HYDN Prevent, HYDN also monitors all transactions and runs detection algorithms across 25 chains 24/7, 365 days a year. This enables us to learn more about, and detect changes in the types and nature of threats over time, and build new detectors to further enhance HYDN Prevent’s performance.

It was through this 24/7 monitoring that we were able to identify a critical vulnerability in SushiSwap’s contracts. Following this we worked together with the Sushi team to rescue over $600k in user assets and help create a fix to protect users.

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Remember, the effectiveness of these strategies can vary depending on the specific design of your smart contract and the broader context in which it operates. It's also worth noting that, while these strategies can reduce the risk of oracle manipulation attacks, they can't completely eliminate it. It's essential to stay informed about the latest developments in DeFi security and continually reassess and update your strategies as needed.

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Conclusion
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In conclusion, oracle manipulation attacks pose a significant challenge to the DeFi landscape, as they exploit the critical link between smart contracts and real-world data. These attacks have highlighted the need for robust and secure oracles that can provide accurate, timely, and tamper-proof data to smart contracts. Understanding how these attacks operate is crucial for developers and users alike, particularly as DeFi continues to evolve and mature.

The case studies of attacks on Mango Markets and bZx/Fulcrum show that these attacks can be both complex and lucrative for the attackers. It's important to note that these are not isolated incidents; many DeFi protocols have been targeted, resulting in significant financial losses. In response, regulatory bodies are stepping in, highlighting the need for legal clarity in the crypto space.

As we look towards the future of DeFi, oracle design, and the development of secure smart contracts will be pivotal in preventing such attacks. Solutions such as using multiple oracles, time delays, and circuit breakers, among others, can contribute to making DeFi protocols more resilient. However, these solutions also need to be balanced with the user experience and efficiency of DeFi platforms. In our work building HYDN Prevent and the general increase in the amount of monitoring solutions available on the market, we believe that real-time transaction protection, such as that provided by HYDN Prevent, will be key in helping to prevent future attacks and bring DeFi in-line with increasing regulatory scrutiny.

Ultimately, the responsibility of building secure DeFi protocols lies with developers, while users must remain vigilant and educated about the potential risks. As DeFi continues to develop and find its place within the broader financial ecosystem, the lessons learned from oracle manipulation attacks will be instrumental in shaping a more secure and robust DeFi landscape.

If you're looking for an industry leading smart contract audit from HYDN, get in touch on Telegram, or by filling in our Contact Form.

Our recent clients include SushiSwap, Sablier, SpookySwap, Revert, Swapsicle, CrossWallet, Nau Finance, Looter, and many more.

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