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$YFI surged and crashed, causing liquidations of over $30 million. dYdX accused market manipulation and reported to the FBI.

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$YFI surged and crashed, causing liquidations of over $30 million. dYdX accused market manipulation and reported to the FBI.

The governance token $YFI of the DeFi protocol Yearn.finance plummeted by 45% within a short 5-hour period on the 18th, causing its market value to evaporate by over $300 million. This led to liquidations exceeding $38 million on the decentralized exchange dYdX. The founder of dYdX described this as market manipulation and stated that a report will be submitted to the FBI.

Note: The term "attacker" refers to individuals who obtained funds through legitimate means, not "hackers" exploiting code vulnerabilities.

The Rollercoaster Ride of $YFI

On November 18th, the Yearn.finance protocol token $YFI experienced a rapid 43% drop within a few hours, following a staggering 225% surge in the token's value over the past month, sparking panic within the community.

Price taken from cryptocurrency exchange Binance

Reports suggest that users were concerned this could be a prelude to a RugPull, claiming that 50% of the circulating supply of the token is held by 10 wallets controlled by developers. However, data from Etherscan indicates that some of these addresses may be owned by cryptocurrency exchanges such as Binance and OKX.

Surge in Liquidations in Derivatives Markets

The drastic volatility also led to a significant number of $YFI derivatives being liquidated across various exchanges. According to Coinglass, centralized exchanges collectively saw $4.55 million in positions liquidated that day, while decentralized exchange dYdX witnessed a staggering $38 million liquidation.

dYdX: $9 Million Insurance Fund Used for User Compensation

Within hours of the incident, the dYdX team announced via a tweet that $9 million had been withdrawn from their insurance fund to compensate users for losses incurred from liquidations:

Last night, around $9 million from the dYdX v3 insurance fund was used to fill the gap from the $YFI market liquidation. The v3 insurance fund is well-funded, with remaining funds of $13.5 million, and user funds were not affected.

This move was met with community skepticism, with some pointing out that using 40% of the insurance fund in one event contradicts the notion of being "well-funded."

Increase in Margin Requirements for Some Markets

Following the incident, dYdX promptly updated and raised initial margin requirements for some lower liquidity trading markets to mitigate potential risks, including those involving tokens such as $YFI, $EOS, $AAVE, and $SUSHI.

Additionally, dYdX announced a ban on such "high-profit trading arbitrage strategies" to prevent similar attacks.

dYdX Founder: Evident Market Manipulation, FBI Informed

dYdX founder Antonio Juliano commented on the incident, stating that the soaring open interest in $YFI contracts was a targeted attack by a single user against dYdX:

  • Within days, the open interest in $YFI contracts on dYdX surged from $800,000 to $67 million
  • This change was driven by a single market participant and can be traced through on-chain data
  • The attacker previously attempted to attack the $SUSHI market on dYdX two weeks ago, but was unsuccessful
  • Compared to other contract markets, the open interest in $YFI contracts on dYdX was abnormally high
  • Prior to the price collapse, the team attempted to raise the initial margin ratio for $YFI, but the effects were not immediate
  • The participant successfully withdrew large amounts of $USDC from dYdX before the price collapse
  • The price collapse in the spot market for $YFI also appears to be due to a single participant deliberately attacking dYdX's large holdings, and it is currently uncertain if it is the same individual

The data clearly indicates that this is a market manipulation scheme orchestrated by a well-capitalized user aiming to extract funds from dYdX.

Additionally, Antonio emphasized that they would offer rewards to investigators assisting in this matter, with no rewards being paid to attackers, and have reported the incident to the Federal Bureau of Investigation (FBI).

However, this move sparked community discussion, with some mocking that traders profiting excessively would attract FBI attention; Antonio responded by citing the "Mango Market Manipulation Event" from October last year as an example:

There is ample evidence that this is illegal market manipulation. The attacker who was arrested by the FBI for manipulating the Mango market is a prime example.

Is this Market Manipulation?

Data tracking team Lookonchain conducted an investigation into the matter, detailing the sequence of events.

However, the tweet was also questioned by users regarding the definition and source of the viewpoint on "market manipulation," suggesting that the incident merely involved significant fund holders engaging in extensive long and short positions and buy-sell activities with $YFI contracts and spot trades, seemingly a reasonable and normal market activity.