Full Report
Perpetuals are a type of trading that is speculating on the price of an asset after some amount of time in the future. The price can either be bet on going up or down. The vulnerability is in the calculation process of the indexing of the pricing. Typically, the index price refers to the average price of the underlying asset. The mark price is the current price offered by the exchange on the future being traded. Within the Perpetual Protocol, these are different though. Index price is the current value of the spot asset, which uses a TWAP. The Mark Price is the most recently traded price value. In future exchanges, the size of the position is limited by the user's initial margin (debt placed in). Otherwise, the user would have bad debt, leading to insolvency in the protocol. So, any vulnerability that can achieve loads of bad debt is bad. Perpetual protocol did not control this with the method above. Instead, they calculated the value of all positions and allowed orders based upon their index price. Since the index price is somewhat manipulable, this becomes a problem! Raising the price, shorting, then dropping the price could lead to large losses in the protocol. How feasible is it to manipulate a pool? They looked at many of the pools and determined that the vMATIC-vUSD was likely the most manipulatable. The process for hitting this issue is fairly complicated with four accounts. Here's how it goes. First, account 0 in creates a massive sell of spot tokens to drive the mark price to fall to 0.8A. The maximum allowed price change is 20%, due to some existing defense in depth measures. Second, account 1 opens up a short position at 1.2A, again, at the maximum amount being 20% manipulation. At this point, account 2 places a long position on the price at 0.8A to a maximum 1.2A through a massive purchase of the spot token. On this step, very large unrealized profit is generated for account 2. Account 3 opens a long taker at the price of 1.2A as a counterparty for account 1, executing the malicious short taker order at this price. Account 2 closes its long position to realize its profits. To me, the key is that since the price is manipulable. This results in a positive gain from both the long and the short. Doing this over and over again (once per minute) could have stolen most of the money from the protocol. On Immunefi, the mediation process went south. The reasoning from Perpetual Protocol didn't make any sense and they offered 5K for a medium instead of 250K for a critical. Eventually, after months of work, they moved this to a critical with a 10K bounty. It seems like specific market conditions had to be meant for this to work but I don't fully understand them.
Analysis Summary