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Cryptogambling / dYdX reveals new risk mitigation measures after burning $9M in insurance fund

dYdX reveals new risk mitigation measures after burning $9M in insurance fund

Publish Date: 20/11/2023
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Decentralized crypto exchange dYdX has revealed new measures to reduce trading risks after using $9 million from its insurance fund to compensate for users’ losses.

According to an announcement on X, dYdX raised margin requirements for certain less liquid markets, affecting tokens like Eos (EOS), 0x Protocol (ZRX), Aave (AAVE), Algorand (ALGO), Internet Computer (ICP), Monero (XRM), Tezos (XTZ), Zcash (ZEC), SushiSwap (SUSHI), THORChain (RUNE), Synthetix (SNX), Enjin (ENJ), 1inch Network (1INCH), Celo (CELO), Yearn.finance (YFI) and Uma (UMA).

On November 17, dYdX activated its insurance fund to compensate for user trading losses due to the liquidation of nearly $38 million in an attack using a “highly profitable trading” strategy on long positions in the YFI token on the exchange.

On November 18, dYdX shared that about $9 million from their version 3 insurance fund was used to cover liquidations in the YFI market. This loss, which did not impact user funds, accounted for a substantial part of the remaining $13.5 million in the insurance fund reserves.

dYdX founder Antonio Juliano explained that within days, YFI’s open interest had surged from $0.8 million to $67 million due to the attack. Juliano said that the same perpetrator had previously attempted an attack on the SUSHI market on dYdX a few weeks earlier.

“We did take action to increase initial margin ratios for $YFI prior to the price crash, but this was ultimately not sufficient. The actor was able to withdraw a good amount of $USDC from dYdX right before the price crash,” Juliano said.

dYdX further announced the prohibition of “highly profitable trading strategies,” referring to the language used by Avraham Eisenberg, the exploiter behind the $116 million attack on Mango Markets in 2022.

dYdX investigating attack

Juliano announced a thorough investigation with partners to uncover details of the alleged attack. dYdX is also reviewing its risk parameters to strengthen against future incidents, potentially adjusting both the v3 framework and dYdX Chain software.

“This was pretty clearly a targeted attack against dYdX, including market manipulation of the entire $YFI market. We are investigating alongside several partners and will be transparent with what we discover,” said Juliano.

dYdX also offers a bounty in exchange for valuable information.

“dYdX will pay bounties to those most helpful in aiding the investigation. We will not pay bounties to, or negotiate with the attacker. We and others have made significant progress into identifying the attacker. We are in the process of reporting the information we have to the FBI,” Juliano said.

Juliano explained that the v3 insurance fund holds $13.5 million, and users’ funds remained unaffected by the incident.

“Even though no user funds were affected, we will also be conducting a thorough review of our risk parameters and making appropriate changes to both v3 and potentially the dYdX Chain software if necessary,” said Juliano.

The lucrative trade erased more than $300 million in YFI token market value, sparking community concerns about a potential insider involvement in the YFI market. There were claims that 50 percent of the YFI token supply resided in 10 wallets managed by developers.

On November 17, the YFI token dropped by 43 percent in a few hours after surging more than 170 percent in November. In the last 30 days, the token has increased by over 90 percent, currently trading at $9,190.

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