Decentralized exchange (DEX) GMX has reportedly experienced price manipulation exploitation by exploiters who managed to make around $565,000 from the AVAX/USD market.
The unknown exploiter purported to exploit GMX’s “minimum spread” and “zero price impact” features, which affected GLP token holders who provided liquidity to GMX in the form of AVAX.
In a September 18 post on Twitter, GMX confirmed the price manipulation exploit, but said the AVAX/USD market would remain open despite a $2 million cap on long positions and a $1 million cap on short positions.
We were alerted to the price manipulation of AVAX/USD on reference exchanges through monitoring systems and community members.
As we review the occurrence, open interest for AVAX is capped at $2m long / $1m short.
The GLP and GMX trading markets will continue to operate normally.
— GMX (@GMX_IO) September 18, 2022
Genesis Trading’s Head of Derivatives Joshua Lim was the first to analyze the exploit, stating that the exploiter “successfully extracted profits from GMX’s AVAX/USD market by opening large positions at 0 slippage” before transferring AVAX/USD to centralized exchanges. Slightly higher price.
Lim said the exploit method was repeated five times on September 18, with the first cycle taking effect at 01:15 UTC. Each cycle transfers 200,000 AVAX tokens (roughly $4-5 million per cycle) and the exploiter extracts around $565,000. After the payout the profit is spread to market makers on other exchanges.
3/ Let’s look at the first cycle from 01:15:31 to 01:28:11 UTC. X was able to make around $158k profit trading clips of $4-5mm at a time pic.twitter.com/W6eu7Iz6lz
— Joshua Lim (@joshua_j_lim) September 18, 2022
However Lim noted that this is not an “exploit”, it “works as GMX is designed to do.”
Technical analyst “Duo Nine” added that the exploit was able to take Convenience Several large trades against GLP holders because the fixed prices provided by the chainlink-run oracles had no price influence, made possible the abuse of price manipulation.
“If traders gain, liquidity providers lose. If traders exploit this vulnerability, GLP holders can lose all their money!
Although GMX immediately closed short and long open interest for AVAX/USD to protect against further manipulation of the DEX, Lim said GMX may have to scrap its “zero price impact” feature even though GMX has successfully onboarded many users so far.
“The real problem is that GMX doesn’t reflect the true cost of liquidity like other venues, which offer unlimited liquidity at mid-market oracle prices.”
The latest exploit comes weeks after the founder of Layer-2 DEX ZigZag “Taureau” said in a September 2nd video call that he doubted GMX’s exchange model would be sustainable in the long term, adding that a trader with the right strategy could delete GLP token holders:
There is $GMX Is a viable system built for the long term?
Full episode pic.twitter.com/MF2Qafxs57
— flywheelpod (@flywheelpod) September 2, 2022
Related: What are decentralized exchanges and how do DEXs work?
The news brought mixed reactions from the GMX community. A Twitter user pointed out In the case of another Twitter user no smart contract was employed He asked GMX whether any compensation will be paid to affected GLP holders.
On GMX, liquidity providers supply BTC, ETH, AVAX and stablecoins in exchange for the GLP token. The protocol was launched in late 2021 on the Ethereum layer-2 scaling network Arbitrum.
According to CoinGecko, GMX Token (GMX) is currently priced at $39.07, down 16.7% in the last 24 hours.