Decentralized exchange (DEX) GMX has reportedly suffered price manipulation from an exploiter, earning around $565,000 from the EVAX/USD market.
The anonymous exploiter is understood to have capitalized on GMX’s “minimum distribution” and “zero price impact” features to pull off the exploit, influencing GLP token holders who submitted to GMX liquidity via AVAX (Avalanche token).
GMX confirmed the price manipulation on Twitter on September 18, but stated that the AVAX/USD market will remain open despite placing $2 million in long positions and $1 million in short positions.
We have been notified of AVAX/USD price manipulation by monitoring systems and referring exchanges by community members.
At the time we rate the event, open interest for AVAX is $2m long/$1m short.
The GLP and GMX trading markets continue to operate normally.
— GMX (@GMX_IO) September 18, 2022
Genesis Trading head of distribution Joshua Lim was among those who analyzed the exploit and said that the exploiter “successfully profited from the GMX AVAX/USD market before we transferred AVAX/USD to the central exchanges. A little higher price.
Lim said this exploit was repeated five times, with the first cycle being executed on September 18 at 01:15 UTC. Each cycle transferred more than 200,000 AVAX tokens, (about $4-5 million per cycle) with the exploit costing about $565,000. At a profit after being distributed to market makers on other exchanges.
3/ Let’s look at the first cycle which was from 01:15:31 to 01:28:11 UTC. X managed to make a profit of about $158,000 by trading 4-5mm clips at a time. pic.twitter.com/W6eu7Iz6lz
– Joshua Lim (@joshua_j_lim) September 18, 2022
But Lim explained that this is not “exploitation” because “GMX is working as designed.”
The technical analyst added that “Duo Nine” could be taken by the exploiter. advantage A number of large transactions with GLP holders have led to the use of price manipulation because the fixed prices provided by Chainlink-run oracles have no price impact.
“If traders make a profit, the liquidity providers lose. GLP holders could lose all their money if traders exploit this vulnerability!”
While GMX will immediately hold short and long open interest in AVAX/USD to protect the DEX from further manipulation, Lim said GMX may need to cancel its “zero price impact” feature despite successfully onboarding many users to date.
The real issue is that GMX does not reflect real liquidity prices like other venues do, offering unlimited liquidity at the mid-market quote price.
The latest exploit comes after Layer-2 DEX ZigZag founder “Taureu” said in a September 2nd video call that he doubts the GMX exchange model will be sustainable in the long term, saying that a trader with the right strategy can clean it up. GLP Token Containers:
which has $GMX Have you built a viable system for the long term?
Founder of Zigzag @bull_21 He has doubts… and predicts that eventually the right strategy and the right amount of money will be lost $GLP
Full episode https://t.co/3k3oLdHFWq pic.twitter.com/MF2Qafxs57
— Flywheelpod (@flywheelpod) September 2, 2022
Community response
The news brought mixed reactions from the GMX community. A Twitter user Bright The fact that no smart contract is used when there is another Twitter user he asked GMX whether any compensation will be paid to affected GLP holders.
Related: What are decentralized exchanges and how do DEXs work?
On GMX, liquidity providers offer BTC, ETH, AVAX and stablecoins in exchange for GLP tokens. The protocol was launched in late 2021 on the Ethereum Layer-2 scaling network Arbitrum.
The GMX token (GMX) is currently at $39.07, down 16.7% in the last 24 hours, according to CoinGecko.