The DEX (decentralized exchange) GMX was allegedly victim to price manipulation by an exploiter who made off with $565,000 from AVAX/USD.
Unidentified exploiter believed to have taken advantage of GMX’s “minimal Spread” and “zero Price Impact” features to pull off an exploit. This affected GLP token holders who provided liquidity through AVAX (the Avalanche to GMX)
In a Sept. 18 tweet, GMX confirmed that price manipulation was being used. However, it stated that the AVAX/USD markets would continue to be open despite a $2million cap on long positions and a $1 million cap for short positions.
Monitoring systems and community members notified us of price manipulations of AVAX/USD on references exchanges. We are reviewing the incident and have set a $2m limit on open-interest for AVAX at $1m. GLP and GMX trading market continue to function normally.
— GMX (@GMX_IO September 18, 2022
Joshua Lim, Head of Derivatives, Genesis Trading was the first to examine the exploit. He stated that the exploiter “successfully extracted profit from GMX’s AVAX/USD markets by opening large positions with 0 slippage”, before transferring the AVAX/USD into centralized exchanges at a slightly lower price.
Lim stated that the exploit method was used five times. The first cycle took effect on September 18th at 01:15 UTC. Each cycle involved more than 200,000 AVAX tokens (roughly $4-5 Million per cycle), with the exploiter netting $565,000 after spreading spread to market makers on other markets.
Let’s look at the third cycle, which ran from 01:15.31 to 01:28.11 UTC. X was able to extract roughly $158k in profit by trading clips of $4-5mm at a time pic.twitter.com/W6eu7Iz6lz
— Joshua Lim (@joshua_j_lim) September 18, 2022
Lim pointed out that this was not an “exploit”, as it was “GMX functioning as designed.”
“Duo Nine”, a technical analyst, said that the exploiter was able take advantage of large trades against GLP owners because fixed prices provided by Chainlink-run Oracles have no price impact. This is what made price manipulation exploitable.
The liquidity providers are at risk if traders make profits. GLP holders could lose their entire money if traders exploit this vulnerability.
Lim stated that GMX could need to remove its “zero price effect” feature, despite the fact that it has successfully onboarded many users.
“The problem is that GMX does not reflect the true cost for liquidity as other venues do. It offers unlimited liquidity at a midmarket oracle rate.”
This latest exploit is just weeks after Layer-2 DEX ZigZag founder “Taureau”, said in a Sept. 2, video call that he doubted GMX’s exchange model would last long-term and that a trader with a good strategy could wipe out GLP token owners:
Is $GMX a long-term viable system? ZigZag Founder @taureau_21 has his doubts… and predicts eventually that a trader with the right strategy and proper size will wipe out $GLP Full Episode https://t.co/3k3oLdHFWq pic.twitter.com/MF2Qafxs57
— Flywheelpod (@flywheelpod), September 2, 2022
Related: What is a decentralized exchange and how does it work?
Reaction from the Community
The news received mixed reactions from the GMX Community. One Twitter user pointed out that no smart contract was exploited. Another Twitter user inquired GMX if compensation would be given to GLP holders who were affected.
In exchange for the GLP token, liquidity providers provide BTC, ETH and AVAX to GMX. The protocol was launched on the Ethereum layer-2 scaling network Arbitrum in late 2021.
According to CoinGecko, the current price of the GMX token (GMX), is $39.07, a 16.7% decrease over 24 hours.
Eileen Wilson –Technology and Energy
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