Crypto lending protocols try to mitigate risks from low-liquidity tokens

Quick Take

  • Concerns over exploits cause crypto lenders to assess the fitness for low-liquidity tokens as collateral assets.

  • With limited assets available for collateral on the platform, Euler Labs head of risk Seraphim Czecker said the systemic risks are reduced for the crypto lender.

Lending platforms continue to scrutinize low-liquidity tokens amid concerns of heightened risks.

In terms of precautions Euler takes to mitigate attacks against tokens with low liquidity, “I would say it’s mostly putting them into non-collateral tier and signaling, on the UI, the oracle risk,” Euler Labs head of risk Seraphim Czecker told The Block. 

Lenders have been uneasy in the context of a $114 million Mango Market exploit, where known actor Avraham Eisenberg used millions in collateral to manipulate price oracles and subsequently borrow huge sums of otherwise unobtainable digital assets.

Although Mango and Eisenburg came to an agreement over the hacked funds, other lending platforms have since opted to review tokens with low liquidity. The STG token may offer a somewhat risky bounty for an attacker with at least $3 million in capital to wager on the endeavor, Eisenburg tweeted.

Czecker acknowledged Eisenburg’s analysis, adding that another potential attack might involve crashing the STG price oracle on Uniswap V3, and lending 1 ETH to borrow the sum of STG available on Euler, and then sell it off for a return. Although the attack isn’t alarming as it localized to STG, Czecker said, he warned users to avoid lending to pools with bad oracles, adding that indicators for this exist in Euler’s user interface.

“Only certain assets are collateral on Euler so the crappy tokens won’t present systemic risk,” Czecker said.

Protocol platform builders at Chaos Labs also cited Eisenberg’s methods when they posted a warning in Aave’s governance forum about markets that could become attack vectors should an actor deploy sufficient starting capital, estimated to be around $100 million. Citing the risk, the firm recommended Aave immediately halt the use of ren (REN) and 0x protocol (ZRX) for collateral.

For crypto lender Compound, the community voted to halt the use of 0x (ZRX), basic attention token (BAT), maker (MKR) and yearn finance (YFI) tokens as lending collateral over fears of market manipulation.

As other crypto lenders explore governance based initiatives, Euler also maintains conservative default lending parameters that are upgraded via governance, according to Czecker.

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