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.

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