DeFi Lending Protocols Hit by Price-Manipulation Attacks

Decentralized finance (DeFi) lending protocols are vulnerable to price-manipulation attacks, which exploit how DeFi protocols value collateral. A price oracle, which provides market data to smart contracts, can be manipulated by attackers to temporarily inflate or deflate the price of an asset.

In a typical attack, an attacker targets a token with weak liquidity and manipulates its price using large trades or swaps. The protocol's pricing system observes the distorted price and treats it as genuine, allowing the attacker to borrow valuable assets against weak collateral. When the manipulated price returns to normal, the collateral becomes worth far less than the outstanding loan, leaving bad debt in its wake.

Flash loans can amplify these attacks by providing attackers with temporary access to large amounts of capital without upfront collateral. While flash loans are not the underlying vulnerability, they can enable attacks that would be difficult or impossible otherwise.