Skip to main content

3 posts tagged with "DeFi"

View All Tags

· 9 min read
Dominik Harz

Or why Oracle Vulnerabilities are not the Worst Application of Flash Loans.


  • You can potentially steal all of Maker’s collateral ($700m) and issue arbitrary amounts of new Dai using flash loans if no delay for new governance contracts is introduced.
  • Anyone can execute the attack and only needs to pay the transaction fees (few $) without holding any MKR.
  • If Maker does not introduce a delay until the liquidity pools for flash loan pools gets above a threshold, there is little chance to prevent the attack (race condition).
  • We have reached out to Maker February 8, 2020 about our research and had a call with them on February 14, 2020 to discuss our findings. Maker is aware of the attack vector and is holding a vote this Friday 12pm PST that would prevent the attack.


Maker and its Dai stablecoin is the most popular so-called decentralized finance (DeFi) project on Ethereum with around of $700m locked in its smart contracts. The Maker protocol relies on a governance process encoded in a smart contract. MKR token holders can vote to replace an existing governance contract. Votes are proportional to the amount of MKR. The total number of MKR tokens is around 987,530 where selected wallets or contracts hold large quantities of the token:

  • [Maker Governance Contract: 192,910 MKR]
  • Maker Foundation: 117,993 MKR
  • a16z: 60,000 MKR
  • 0xfc7e22c6afa3ebb723bdde26d6ab3783aab9726b: 51,291 MKR
  • 0x000be27f560fef0253cac4da8411611184356549: 39,645 MKR

Note: the Maker Governance Contract contains MKR tokens of multiple parties.

Governance Attack

In a post from December 2019, Micah Zoltu pointed out how to attack the Maker governance contract. The basic idea is to accumulate enough MKR tokens to replace the existing governance contract with the attackers, malicious, governance contract. The malicious governance contract is then able to give the attacker full control over the system and withdraw any collateral in the system as well as create arbitrary amounts of new Dai.

To reduce the number of required MKR tokens, he proposed to execute the attack when new governance contracts are being voted on. At the moment, 192,910 MKR tokens are locked in the governance contract. However, an attacker would need less tokens if, say two or three contracts, would be voted on in parallel with similar token distributions. This frequently happened in the past as we can observe in the graph below:

The obvious attack strategy would be to crowd-fund the required MKR tokens through a smart contract and pay each attacker a share of the of the winnings. However, the attackers need to amass probably around 50k MKR tokens to have a chance to attack the system without Maker noticing these movements. We do show a strategy for this in our latest paper.

A Brave New Attack Strategy: Flash Loans

However, we can completely lift the requirement to amass MKR tokens if we consider using flash loans instead. Flash loans are a fairly new concept and therefore we give a brief explanation here. Normally, an agent has to provide collateral to take out a loan in the DeFi space. For example, in Maker, Alice can borrow Dai by depositing ETH. This is required since we operate under a model of weak identities and economically rational agents.

A flash loan lifts this requirement as it only takes place in a single transaction:

  1. Alice takes out the loan from a flash loan liquidity provider (e.g. Aave or dYdX)
  2. Alice executes some actions (e.g. arbitrage trading on Uniswap, Fulcrum, Kyber etc.)
  3. Alice pays back the flash loan with interest

A flash loan works in three steps within a single transaction.

The flash loan works because of how the Ethereum Virtual Machine is designed: if at any point during this transaction the flash loan fails, the whole transaction is reverted. Hence, Alice can take the loan risk free, i.e. if she cannot pay it back it would be like she would have never taken it. The liquidity providers are also winning: they have only lent their funds if Alice was able to pay them back.

Arbitrage and Oracle Manipulation with Flash Loans

On February 14 and February 18, two incidents involving flash loans occurred that caused bZx to halt its platform. In the first transaction, a single flash loan was able to make a profit of 1,193 ETH (approx. $298,250). This transaction was executed using a smart contract that opened a short position on Fulcrum on wBTC. In the same transaction, the transaction took out a wBTC loan on Compound and executed a trade of wBTC on Kyber’s Uniswap reserve resulting in slippage ultimately bringing down the price on Fulcrum as well. The full details can be found in the post-mortem by bZx and a detailed analysis of the involved calls by PeckShield.

Similarly, a second incident occurred on February 18 where in a single transaction a profit of 2,378 ETH (approx. $600,000) was made. This transaction involved an initial borrowing of 7,500 ETH to take a long position on Synthetix' sUSD. More details are found in this informal analysis.

Oracle Manipulation to Reduce Required Liquidity

For our attack, we assume that 50k MKR are sufficient. Even if in practice the number of tokens could be higher, we point out how the concept of flash loans makes securing Maker, without a governance delay, hard. In a naive approach, the attacker could take out a flash loan to buy 50k MKR tokens.

At current exchange rates, the attacker needs around 485,000 ETH to buy that amount of MKR as only a single exchange, Kyber, has enough volume available. However, the attacker can also leverage multiple exchanges and buy 38k MKR from Kyber, 11.5k from Uniswap, and 500 MKR from Switcheo for a total of 378,940 ETH. That number is still high but already a reduction by almost 100,000 ETH!

An attacker can use the oracle manipulation strategies above to effectively bring down the price of MKR on Kyber and Uniswap. These are the two largest providers of MKR and have shown to be vulnerable to oracle price manipulation. Further analysis is required to determine how much the MKR price can be reduced. However, on a less liquid token like wBTC an attacker was able manipulate the exchange rate by around 285%.

Obtaining enough Liquidity


Even with oracle manipulation, a large number of ETH is required to execute the attack on Maker. However, an attacker can increase its liquidity by taking out two flash loans within the same transaction. Aave and dYdX protect themselves against reentrancy and allow only a single flash loan within a single transaction. But the attacker can borrow ETH from both protocols within the same transaction.

Thus, as of February 18, the attacker has a pool of around 90k ETH on dYdX plus 17k ETH on Aave available. Hence, at current liquidity rates an attacker could take out a combined ~107k ETH loan from both dYdX and Aave to try to manipulate the MKR token price and obtain enough MKR tokens to replace the current Maker governance contract with its own.

For this to succeed the attacker must be able to reduce average MKR price by at least 3.54 times. Alternatively, the attacker can also wait for dYdX and Aave to increase its liquidity pools. With the current growth rate of around 5% of both protocols, it does not seem unlikely that the attack becomes possible within two months.


Obviously, it is possible to combine the crowd funding approach and the flash loan together. Using the available liquidity of ~107k ETH, it is possible to obtain around 10,800 MKR from Kyber. This would allow multiple attackers to reduce the required amount of pooling together 50k MKR to just around 39.2k MKR. It seems also that some people are indeed interested in such an attack as this informal Twitter poll shows:

It can also be noted that the top four account holders (in fact five, but not considering the current Maker Governance Contract) are able to execute the attack without crowdfunding.

No Time to Wait

Once enough liquidity is available through the flash loan lending pools (with or without the combination of using oracle manipulation), anyone is able to take over the Maker governance contract. Once Maker starts a vote when the liquidity pools have reached that threshold, Maker needs to ensure that MKR tokens are as little distributed as possible. If the distribution of MKR at any point in this voting procedure allows for an exploit of the vulnerability, any collateral can be taken away.

That attacker would be able to steal $700m worth of ETH collateral and be able to print new Dai at will. This attack would spread throughout the whole DeFi space as Dai is used as backing collateral in other protocols. Further, the attacker can use his Dai to trade other currencies worth around $230m. We give a more detailed analysis in our paper.

Counter measure

Maker should put a new governance contract in place that prevents flash loans from attacking their system. Specifically, a new governance contract should be able to be checked by the Maker Foundation for malicious code and give enough time to react. At the bare minimum, a new governance contract should not be able to go live within a single transaction. That way, the attacker can likely not profit from the attack and thus not repay the flash loan. If the attacker cannot repay the flash loan, the attack is like it would have never happened.

Maker is putting such a contract to vote on Friday, 12pm PST, February 21, 2020. The proposed contract would activate the Governance Security Module (GSM) and prevent such a flash loan attack.

· 11 min read
Dominik Harz

Contracts can be used to enforce agreements between entities. To this extent, smart contracts have been proposed by Nick Szabo and implemented for example in Bitcoin. This article covers the basics of mechanism design of smart contracts in the context of Bitcoin. Mechanism design is concerned with creating or encoding preferences in an agreement. Hence, an author of a smart contract can create a mechanism that enforces certain behaviour of the agents (or humans) interacting with the contract. Essentially, the author of the contract wants to reward desired behaviours and punish undesired behaviours. This is widely used in cryptocurrency protocols including the Lightning Network or Ethereum-based protocols such as Casper or TrueBit.

Use Case: Agents having access to sensors could sell the sensor data they are collecting to agents willing to buy this data. This represents a simple contract where a resource is exchanged for a price. Bitcoin in combination with payment channels secure the payments and allow for micro-payments. Thus, one has to design protocols integrating with these existing technologies to achieve for example secure decentralised data exchanges.

Bitcoin and smart contracts

Nakamoto introduced Bitcoin as a way to send money between peers without trusted third parties [2]. In Nakamoto consensus the heaviest chain is considered having correct transactions as most miners have contributed to this specific chain by solving a proof of work (PoW) puzzle. Assuming that the majority of players in the system are honest (i.e. 50%+150\% + 1), the heaviest chain represents the "true" state of the network.

Bitcoin also included the capability of executing smart contracts with Bitcoin Script [3]. A smart contract is a piece of software which formalises a relationship between entities much like a legal contract [4]. However, the idea is to use secure computer protocols and include game theoretic elements to cover aspects that cannot be adequately verified in the protocol. Szabo argues that smart contracts cover interactions including search, negotiation, commitment, performance, and adjudication.

Rational agents

Agents in decentralised systems are self-interested [5]. Hence, protocols facilitating (economic) interactions between agents need to account for autonomous agents to behave rationally. A set of agents P={1...n}P = \{1 ... n\} is considered to be rational if they seek maximise their utility uiu_i depending on some function [5] [6] [1]. This is especially relevant in decentralised systems, where we have to assume agents act only in their interest. Agents can apply multiple strategies sSs \in S within a negotiation [1]. We have to assume that agents will execute actions θΘ\theta \in \Theta based on ss that optimises their utility including cheating, lying, breaking contracts, and hiding their intentions. However, we also assume that agents that interact can find an outcome ωΩ\omega \in \Omega that increases or optimises uiu_i.

Mechanism design

Mechanism design is used to encode preferences in an agreement. Essentially, a "designer" defines a preferred social choice which, under the assumption of rational agents, the mechanism is intended to favour [6]. Considering a contract CC as an agreement between agents, CC implements a mechanism M=(Σ,g)M = (\Sigma, g) [7]. The outcome of the mechanism gg depends on the actions of agents Σ\Sigma. MM implements a rule ff. Rational agents would only enter CC or follow CC if ff is the result of the dominant strategies or Nash equilibrium of the agents.

An agent will have multiple options to enter contracts with other agents. To ensure that the proposed contract CC is chosen, we want to have it incentive compatible. Loosely speaking incentive compatibility of a mechanism occurs when the utility uiu_i of each agent ii is maximised when an agent is "truth-telling" (i.e. the dominant strategy). In games without money, non-trivial choices (e.g. more than two contracts, multiple potential agents, multiple different terms) lead either to incentive incompatibility, or the social choice function is a dictatorship according to the Gibbard--Satterthwaite theorem. However, in Bitcoin, we can construct games with money.

Games in Bitcoin

In games with money, a Vickery-Clarke-Groves (VCG) mechanism maximises social welfare. A VCG mechanism is incentive compatible. Hence an agent strives to implement a contract as such a mechanism. To construct such games the mechanism the Clarke pivot rule can be applied [6]. Agents in Bitcoin are playing a game with strict incomplete information. One could argue that an agent could potentially analyse actions of an agent as transactions are public. However, as agents might take multiple identities (Sybil), this is a non-trivial task, and thus, we will not consider it in this case. We further assume that agents have independent private values, i.e. resources subject to trade do not depend on the other agents.

Such a game can be defined as follows [6]:

  • A set of players P={1,..,n}P = \{1, .., n\} exists.
  • Every player ii has a set of actions Σi\Sigma_i.
  • Every player ii has a set of types TiT_i. A value tiTit_i \in T_i is a private input to the player.
  • Every player ii has a utility function uiu_i. The utility function depends on its private input and the actions of all players ui=(ti,σ1,..,σn)u_i = (t_i, \sigma_1, .., \sigma_n).

Hence, a player must choose an action only based on his private input but without knowing the private inputs of other agents. A strategy ss describes an agent's decision to execute a specific action based on a private input. The agent will choose ss that is the best response to any σ\sigma by other agents.

However, an agent needs to optimise a specific social choice. In Bitcoin, we are not concerned with social welfare as a social choice as this is unknown to the agents and they are not naturally interested in the utility of others. In the case that only two agents are involved and we have a simple contract concerning one resource, single-parameter domains can be applied [6]. In such domains, the valuation viv_i of an agent depends only on one parameter, say obtaining the resource. Moreover, the price an agent is willing to pay is already included in the incentive mechanism.

Yet, this would only hold for the case where two agents compete for obtaining a single resource. In more complex cases, for example, adding the quality of the data, we need to apply a more complex social choice function. In these cases, variations of VCG are the only incentive compatible mechanisms [6].


Using the resource exchange formalisation described in [1] the following tuple defines the exchange setting:

(P,Z,(vi)iP)(P,\mathcal{Z}, (v_{i})_{i \in P})

We are assuming that two agents exist, i.e. two players P={A,B}P = \{A, B\}. Those agents are exchanging a purely digital resource for a specific price. The agents negotiate over a single resource zZz \in \mathcal{Z}. Moreover, they use a valuation function vi:2ZRv_i : 2^{\mathcal{Z}} \to \mathbb{R}. Agent AA hence defines the value vA(z)v_A(z) individually as well as agent BB in vB(z)v_B(z).

This valuation expresses the price an agent is willing to exchange the resource for, whereby we assume that vAvBv_A \leq v_B if AA is offering the resource and BB, is willing to pay for it. Otherwise, there would be no price for them agree on. In this simple case, we assume that the agents follow the negotiation protocol truthfully and that their utility UU increases when making a deal and exchanging the resource. We further assume that the agents have a way to enter such an agreement, i.e. one of them can prepare a contract that the other one can interpret and willing to commit to.


The contract CC is implemented as an Hashed Timelock Contract (HTLC) [8] with multiple transactions in the Lightning Network. Note that AA sells data zz, and BB buys it for the agreed price pp in Satoshi. To allow agents to exchange zz and atomic swap is used. This protocol has been described for cross-chain transactions but is equally useful within a single chain [9].

  1. AA stores zz on IPFS receiving H(z)H(z). AA uses this as the secret for the HTLC and sends this to BB. As AA takes the Merkle root of zz, the data can be of (almost) any size.
  2. BB prepares a transaction transferring pp to AA spendable with the signature of AA. Also, BB includes the spending condition H(input)==H(z)H(input) == H(z) based on the IPFS hash of the file. BB is also setting a time tt after which the transaction must be spent, otherwise, BB can redeem the locked funds. Last, BB sends the transaction to AA to sign it.
  3. AA signs the transaction to agree to the trade and commits it to the channel.
  4. AA reveals the H(z)H(z) to issue the payment, which gives BB H(z)H(z). BB obtains zz through IPFS.

This contract allowed an atomic swap of the file without the need to upload the file to Bitcoin. It requires both agents to be online which is a reasonable assumption for autonomous agents. The protocol does not handle the security of the file. Any party observing H(z)H(z) can access zz without paying any price. Hence, the protocol could be extended using GPG or other asymmetric encryption schemes. In that case, AA could take BB's public RSA key to encrypt zz and then store it on IPFS. This would allow private trading of the file.

Mechanism analysis

Players: AA and BB are the only players in the game. They have the same capabilities and pre-contract the same norms. Post-contract one agent has the obligation to pay for zz and the other has an obligation to provide zz. The contract is atomic. Hence, payment and delivery occur at the same time. However, there is a possible weakness in the contract. If AA reveals H(z)H(z) without having the file stored on IPFS any more, BB will not be able to retrieve the file.

Types: Both players have a valuation v(z)v(z). AA has private access to zz.

Strategy: AA has three actions: not reveal H(z)H(z), reveal H(z)H(z) and have zz accessible, and reveal H(z)H(z) and have zz inaccessible. BB has two actions: prepare HTLC with a payment pp for AA or not. Assuming BB's valuation of vB(z)>0v_B(z) > 0, BB will propose a minimum payment. Since there is no proof of zz being available and the desired resource, BB has to account for this risk. The protocol could be improved by using concepts such as proof of replication [10]. AA will only consider revealing H(z)H(z) in the proposed HTLC if pvA(z)p \geq v_A(z). Moreover, AA might cheat BB by not making zz available. In case AA expects future trades with BB, it has a motivation to actually provide zz. BB might promise a higher pay for future interactions and adjust his valuation function to the resource zz provided by AA to a higher value since AA is based on previous direct experience trusted.

Utility: Utilities depend on the combination of strategies.

  • BB proposes HTLC with payment pp and AA reveals H(z)H(z) with zz available: uA=pvA(z)u_A = p - v_A(z) and uB=vB(z)pu_B = v_B(z) - p. Under the assumption that AA does not loose anything from selling zz.
  • BB proposes HTLC with payment pp and AA reveals H(z)H(z) with zz unavailable: uA=pvA(z)u_A = p - v_A(z) and uB=0pu_B = 0 - p.
  • BB proposes HTLC with payment pp and AA does not reveal H(z)H(z): uA=0u_A = 0 and uB=0u_B = 0.
  • BB does not propose HTLC: uA=0u_A = 0 and uB=0u_B = 0.

Social choice: Since BB proposes the contract, BB can set the social choice function. In this case, a single parameter domain is useful. The utility analysis shows that pp has the condition vA(z)pvB(z)v_A(z) \leq p \leq v_B(z). Since BB is not able to be sure that zz is available, pp will be low in the first tries as BB tries to manage his risk exposure. However, BB could argue that AA might be interested in future trades and include this as part of his utility function as an expected value. Hence, BB would only propose a contract if p<<vB(z)p << v_B(z) since otherwise the risk is too high.


[1] S. Fatima, S. Kraus, and M. Wooldridge, Principles of Automated Negotiation. Cambridge: Cambridge University Press, 2014 [Online]. Available:

[2] S. Nakamoto, "Bitcoin: A peer-to-peer electronic cash system," 2008.

[3] Bitcoin Wiki, "Script." 2018 [Online]. Available:{\#}Opcodes. [Accessed: 27-Jun-2018]

[4] N. Szabo, "Formalizing and Securing Relationships on Public Networks." 1997 [Online]. Available: [Accessed: 07-Apr-2017]

[5] T. W. Sandholm and V. R. Lesser, "Leveled Commitment Contracts and Strategic Breach," Games and Economic Behavior, vol. 35, nos. 1-2, pp. 212--270, 2001.

[6] N. Nisan, T. Roughgarden, E. Tardos, and V. V. Vazirani, Algorithmic Game Theory, vol. 1. Cambridge: Cambridge University Press, 2007, pp. 1--754 [Online]. Available: [](

[7] N. Nisan and A. Ronen, "Algorithmic Mechanism Design," Games and Economic Behavior, vol. 35, nos. 1-2, pp. 166--196, Apr. 2001 [Online]. Available:

[8] Bitcoin Wiki, "Hashed Timelock Contracts." 2018 [Online]. Available:{\_}Timelock{\_}Contracts. [Accessed: 28-Jun-2018]

[9] I. Bentov et al., "Tesseract: Real-Time Cryptocurrency Exchange using Trusted Hardware," 2017 [Online]. Available:{~}iddo/RTExchSGX.pdf

[10] A. Juels and B. Kaliski Jr., "Pors: Proofs of retrievability for large files," Proceedings of the ACM Conference on Computer and Communications Security, pp. 584--597, 2007 [Online]. Available:{\&}partnerID=40{\&}md5=83cf075b3704d4fe5bfb2ccf38c39362

· 4 min read
Dominik Harz

As public reputation becomes one of the most important success factors beyond financial success, investment opportunity should ensure ethical decisions and keep sustainable investment as core of their strategy. These long-term investment strategies based on criteria other than pure financial data are summarized under "Value Investment". Value investment is based on the assumption that the current price of an asset might not be the actual value of an asset (e.g. stocks and derivatives). Thus, criteria other than their current prices can be taken into account to calculate their value. The value investing approach offers thereby methods to select potential investment based on social or sustainability criteria. Furthermore, value investment includes diversification of the portfolio to achieve a desired level of risk.

In this blog post I will introduce dInvest, a project Tharidu and me are working on. With the development of blockchain technologies and the Ethereum blockchain, an autonomous and decentralized approach can be taken to create an investment opportunity. Users are able to invest directly with the cryptocurrency Ether into a company which exists in the Ethereum blockchain. Alternatively, they can invest with other cryptocurrencies (e.g. Bitcoin) or fiat currencies by utilizing currency exchanges. An autonomous organization build on Smart Contracts exists solely as code and can execute the details as specified in the contract. As an example, The DAO enabled users to act as venture capitalists by suggesting investments to other users. If a certain amount of investments was raised the contracts would be executed inside the blockchain. However, this approach failed as The DAO suffered security flaws, which led to a severe attack on its system. Furthermore, The DAO failed to give incentives to users proposing investments. Investments are voted for two weeks, while a vote can only be given by bounding a user’s capital into the vote. Thus, late voting and waiting for other’s resulted in available capital.


Certain investors want to invest their money in order to gain returns while being socially responsible and sustainable to e.g. achieve corporate sustainability objectives. However, financial intermediaries, such as investment banks or hedge funds, do not always adhere to investors’ requirements as there might be conflicting interests. Furthermore, the investment strategy applied by the financial intermediary can change through time and is highly influenced by social factors. In addition to that, investors do not have complete transparency over the transactions.

Our work

We decided to develop an autonomous hedge fund in the Ethereum blockchain. Users are represented in the Ropsten network of the Ethereum blockchain as addresses. Users can hold certain amounts of test Ether, which they can invest into dInvest. The investment will contain an amount of Ether and a time period defined by the user. The details of the investment will be defined in a smart contract between the user and dInvest. Selecting stocks for different investment amounts and time periods is comparably computation intensive and will require the application of investment algorithms. Thus, their executing is costly in the blockchain and will therefore be executed by an autonomous agent (invest agent) outside of the blockchain. The required information will be passed on to dInvest on demand and therefore keeping the operational cost to a minimum. The invest agent will suggest investment strategies to the hedge fund according to the current Ether value. The hedge fund will decide to approve or reject the offer based on the sustainability criteria of users’ investments. Only if the criteria is fulfilled, the Ether will be transferred to the buy agent and make the investment. The invest agent will transfer the investment return to the hedge fund where the profit/loss will be divided to investors according to their investment value.

We managed to achieve a linear cost function of user investments and their sustainability criteria in the smart contract. Based on a value investment investment strategy we managed to achieve around 360% increase of the portfolio in a back-testing simulation over around 6 years. The sustainability criteria was implemented using exclusion of assets based on industry codes (i.e. exclusion of defense, alcohol, tobacco, or coal industries). If you are interested in the academic side and the results of our implementation, you can check out our report. As the paper does not cover the implementation in detail, I will post the details in separate blog posts and link them here. You can also check out our source code on GitHub.