dYdX exchange reveals post-mortem results of $9m November attack

Decentralized exchange dYdX has released a comprehensive report analyzing the “targeted attack” it encountered on its v3 platform in November.

The incident led to a substantial loss of $9 million from its insurance fund, a figure that constitutes about 40% of the fund’s total value.

dYdX stated in their Jan. 3 report that their investigation has successfully revealed the identity of the attacker, with whom they are now in communication.

Additionally, the platform is considering various legal measures to take against the perpetrator responsible for the attack.

“dYdX is assisting law enforcement in their investigation of this matter and is assessing all legal options. dYdX is committed to taking any legal action it deems appropriate in these circumstances.”

dYdX team

How was the hack executed?

The investigation revealed that the attacker carried out numerous 5x leveraged long positions in YFI, the native token of the defi protocol Yearn Finance, utilizing over 100 different wallets.

By purchasing YFI tokens from multiple addresses, the attacker dramatically inflated the token’s price by 215%.

They then reinvested the unrealized profits into further YFI-USD positions, ultimately reaching a total value of around $50 million.

To counteract this, dYdX quickly increased the initial margin requirement and adjusted position sizes for the YFI-USD market on Nov. 17. Despite these efforts, the following day witnessed a sharp 30% drop in YFI’s price within an hour.

As a result, the insurance fund automatically compensated for the losses incurred by the attacker, as explained by dYdX.

The report additionally highlighted a related event that occurred a week earlier, where the same method was used by the attacker, this time focusing on the cryptocurrency SUSHI.

Although the attacker managed to withdraw roughly $5 million in profits, this did not affect dYdX’s v3 insurance fund since the exchange had already increased the initial margin requirement to 100%, thereby blocking additional profits for the attacker.

dYdX reassured its clients that customer funds remained secure and unaffected by these incidents. Additionally, the manipulative strategy employed in the YFI market did not yield significant profits for the attacker.

In response to these attacks, dYdX has updated its v3 trading platform to enhance its monitoring and alerting mechanisms for open interest.

Additionally, the company highlighted that its forthcoming v4 chain is being developed with features to counter such risks, including an automatic adjustment of the initial margin fraction in response to unusual price movements.

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