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The March 13 flash mortgage assault towards Euler Finance resulted in over $195 million in losses. It brought about a contagion to unfold by means of a number of decentralized finance (DeFi) protocols, and a minimum of 11 protocols apart from Euler suffered losses because of the assault.
Over the subsequent 23 days, and to the nice aid of many Euler customers, the attacker returned the entire exploited funds.
However whereas the crypto neighborhood can have a good time the return of the funds, the query stays whether or not comparable assaults might trigger large losses sooner or later.
An evaluation of how the assault occurred and whether or not builders and customers can do something to assist forestall these sorts of assaults sooner or later could also be useful.
Fortunately, Euler’s developer docs clearly clarify how the protocol works, and the blockchain itself has preserved a whole file of the assault.
How Euler Finance works
In response to the protocol’s official docs, Euler is a lending platform much like Compound or Aave. Customers can deposit crypto and permit the protocol to lend it to others, or they’ll use a deposit as collateral to borrow crypto.
The worth of a person’s collateral should at all times be greater than what they borrow. Suppose a person’s collateral falls under a selected ratio of collateral worth to debt worth. In that case, the platform will permit them to be “liquidated,” which means their collateral might be bought off to pay again their money owed. The precise quantity of collateral a person wants relies upon upon the asset being deposited vs. the asset being borrowed.
eTokens are belongings, whereas dTokens are money owed
Every time customers deposit to Euler, they obtain eTokens representing the deposited cash. For instance, if a person deposits 1,000 USD Coin (USDC), they are going to obtain the identical quantity of eUSDC in change.
Since they develop into price greater than the underlying cash because the deposit earns curiosity, eTokens don’t have a 1:1 correspondence with the underlying asset when it comes to worth.
Euler additionally permits customers to realize leverage by minting eTokens. But when they do that, the protocol will ship them debt tokens (dTokens) to steadiness out the belongings created.
For instance, the docs say that if a person deposits 1,000 USDC, they’ll mint 5,000 eUSDC. Nonetheless, in the event that they do that, the protocol can even ship them 5,000 of a debt token known as “dUSDC.”
The switch perform for a dToken is written otherwise than an ordinary ERC-20 token. For those who personal a debt token, you possibly can’t switch it to a different particular person, however anybody can take a dToken from you in the event that they wish to.
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In response to the Euler docs, a person can solely mint as many eTokens as they’d have been in a position to by depositing and borrowing over and over, because it states, “The Mint perform mimics what would occur if a person deposited $1,000 USDC, then borrowed $900 USDC, then redeposited that $900 USDC, to borrow $810 extra USDC, and so forth.”
Customers liquidated if well being scores drop to 1 or under
In response to a weblog put up from Euler, every person has a “well being rating” based mostly on the worth of the eTokens held of their wallets vs. the worth of the dTokens held. A person must have a larger greenback worth of eTokens than dTokens, however how way more is determined by the actual cash they’re borrowing or depositing. Regardless, a person with sufficient eTokens could have a well being rating larger than 1.
If the person barely falls under the required variety of eTokens, they are going to have a well being rating of exactly 1. It will topic them to “mushy liquidation.” Liquidator bots can name a perform to switch among the person’s eTokens and dTokens to themselves till the borrower’s well being rating returns to 1.25. Since a person who’s barely under the collateral necessities will nonetheless have extra collateral than debt, the liquidator ought to revenue from this transaction.
If a person’s well being rating falls under 1, then an rising low cost is given out to the liquidator based mostly on how dangerous the well being rating is. The more severe the well being rating, the larger the low cost to the liquidator. That is meant to make it possible for somebody will at all times liquidate an account earlier than it accumulates an excessive amount of dangerous debt.
Euler’s put up claims that different protocols provide a “fastened low cost” for liquidation and argues why it thinks variable reductions are superior.
How the Euler assault occurred
Blockchain knowledge reveals that the attacker engaged in a sequence of assaults that drained varied tokens from the protocol. The primary assault drained round $8.9 million price of Dai (DAI) from the Dai deposit pool. It was then repeated over and over for different deposit swimming pools till the full quantity was drained.
The attacker used three completely different Ethereum addresses to carry out the assault. The primary was a sensible contract, which Etherscan has labeled “Euler Exploit Contract 1,” used to borrow from Aave. The second handle was used to deposit and borrow from Euler, and the third was used to carry out a liquidation.
To keep away from having to repeatedly state the addresses that Etherscan has not labeled, the second account might be known as “Borrower” and the third account “Liquidator,” as proven under:
The primary assault consisted of 20 transactions in the identical block.
First, Euler Exploit Contract 1 borrowed 30 million DAI from Aave in a flash mortgage. It then despatched this mortgage to the borrower account.
After receiving the 30 million DAI, borrower deposited 20 million of it to Euler. Euler then responded by minting roughly 19.6 million eDAI and sending it to borrower.
These eDAI cash have been a receipt for the deposit, so a corresponding quantity of dDai was not minted within the course of. And since every eDAI could be redeemed for barely multiple DAI, the borrower solely acquired 19.6 million as a substitute of the total 20 million.
After performing this preliminary deposit, borrower minted roughly 195.7 million eDAI. In response, Euler minted 200 million dDAI and despatched it to borrower.
At this level, borrower was close to their eDAI mint restrict, as they’d now borrowed about 10 occasions the quantity of DAI they’d deposited. So their subsequent step was to repay among the money owed. They deposited the opposite 10 million DAI they’d held onto, successfully paying again $10 million of the mortgage. In response, Euler took 10 million dDAI out of borrower’s pockets and burned it, lowering borrower’s debt by $10 million.
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The attacker was then free to mint extra eDAI. Borrower minted one other 195.7 million eDAI, bringing their eDAI complete minted to round 391.4 million. The 19.6 million eDAI in deposit receipts introduced borrower’s eDAI complete to about 411 million.
In response, Euler minted one other 200 million dDai and despatched it to borrower, bringing borrower’s complete debt to $400 million.
As soon as borrower had maximized their eDAI minting capability, they despatched 100 million eDai to the null handle, successfully destroying it.
This pushed their well being rating effectively under 1, as they now had $400 million in debt vs. roughly $320 million in belongings.
That is the place the liquidator account is available in. It known as the liquidate perform, getting into borrower’s handle because the account to be liquidated.
In response, Euler initiated the liquidation course of. It first took round 254 million dDAI from borrower and destroyed it, then minted 254 million new dDai and transferred it to liquidator. These two steps transferred $254 million price of debt from borrower to liquidator.
Subsequent, Euler minted a further 5.08 million dDAI and despatched it to liquidator. This introduced liquidator’s debt to $260 million. Lastly, Euler transferred roughly 310.9 million eDAI from borrower to liquidator, finishing the liquidation course of.
Ultimately, borrower was left with no eDAI, no DAI, and 146 million dDAI. This meant that the account had no belongings and $146 million price of debt.
Then again, liquidator had roughly 310.9 million eDAI and solely 260 million dDAI.
As soon as the liquidation had been accomplished, liquidator redeemed 38 million eDAI ($38.9 million), receiving 38.9 million DAI in return. They then returned 30 million DAI plus curiosity to Euler Exploiter Contract 1, which the contract used to pay again the mortgage from Aave.
Ultimately, liquidator was left with approx. $8.9 million in revenue that had been exploited from different customers of the protocol.
This assault was repeated for a number of different tokens, together with Wrapped Bitcoin (WBTC), Staked Ether (stETH) and USDC, amounting to $197 million in exploited cryptocurrencies.
What went incorrect within the Euler assault
Blockchain safety companies Omniscia and SlowMist have analyzed the assault to attempt to decide what might have prevented it.
In response to a March 13 report from Omniscia, the first downside with Euler was its “donateToReserves” perform. This perform allowed the attacker to donate their eDAI to Euler reserves, eradicating belongings from their pockets with out eradicating a corresponding quantity of debt. Omnisica says that this perform was not within the authentic model of Euler however was launched in Euler Enchancment Proposal 14 (eIP-14).
The code for eIP-14 reveals that it created a perform known as donateToReserves, which permits the person to switch tokens from their very own steadiness to a protocol variable known as “assetStorage.reserveBalance.” Every time this perform is known as, the contract emits a “RequestDonate” occasion that gives details about the transaction.
Blockchain knowledge reveals that this RequestDonate occasion was emitted for a price of 100 million tokens. That is the precise quantity that Etherscan reveals have been burned, pushing the account into insolvency.
Of their March 15 evaluation, SlowMist agreed with Omniscia in regards to the significance of the donateToReserve perform, stating:
“Failure to verify whether or not the person was in a state of liquidation after donating funds to the reserve handle resulted within the direct triggering of the mushy liquidation mechanism.”
The attacker might need additionally been in a position to perform the assault even when the donate perform had not existed. The Euler “EToken.sol” contract code on GitHub incorporates an ordinary ERC-20 “switch” perform. This appears to indicate that the attacker might have transferred their eTokens to a different random person or to the null handle as a substitute of donating, pushing themselves into insolvency anyway.
Nonetheless, the attacker did select to donate the funds relatively than switch them, suggesting the switch wouldn’t have labored.
Cointelegraph has reached out to Omniscia, SlowMist and the Euler group for clarification on whether or not the donateToReserves perform was important to the assault. Nonetheless, it has not acquired a response by publication time.
Associated: Euler group denies on-chain sleuth was a suspect in hack case
The 2 companies agreed that one other main vulnerability in Euler was the steep reductions provided to liquidators. In response to SlowMist, when a lending protocol has a “liquidation mechanism that dynamically updates reductions,” it “creates profitable arbitrage alternatives for attackers to siphon off a considerable amount of collateral with out the necessity for collateral or debt reimbursement.” Omniscia made comparable observations, stating:
“When the violator liquidates themselves, a percentage-based low cost is utilized […] guaranteeing that they are going to be ‘above-water’ and incur solely the debt that matches the collateral they are going to purchase.”
The right way to forestall a future Euler assault
In its evaluation, SlowMist suggested builders on how you can forestall one other Euler-style assault sooner or later. It argued that lending protocols mustn’t permit customers to burn belongings if this may trigger them to create dangerous debt, and it claimed that builders ought to be cautious when utilizing a number of modules that will work together with one another in surprising methods:
“The SlowMist Safety Staff recommends that lending protocols incorporate vital well being checks in capabilities that contain person funds, whereas additionally contemplating the safety dangers that may come up from combining completely different modules. It will permit for the design of safe financial and viable fashions that successfully mitigate such assaults sooner or later.”
A consultant from DeFi developer Spool advised Cointelegraph that technological threat is an intrinsic characteristic of the DeFi ecosystem. Though it could possibly’t be eradicated, it may be mitigated by means of fashions that correctly fee the dangers of protocols.
In response to Spool’s threat administration white paper, it makes use of a “threat matrix” to find out the riskiness of protocols. This matrix considers components such because the protocol’s annual share yield (APY), audits carried out on its contracts, time since its deployment, complete worth locked (TVL) and others to create a threat ranking. Customers of Spool can make use of this matrix to diversify DeFi investments and restrict dangers.
The consultant advised Cointelegraph that Spool’s matrix considerably lowered investor losses from the Euler incident.
“On this incident, the worst affected Good Vaults, these designed by customers to hunt increased (and riskier) yields, have been solely affected for as much as 35%. The bottom affected vault with publicity to Euler methods (by way of Harvest or Idle), compared, was solely affected by 6%. Some vaults had zero publicity and have been thus not impacted,” they said.
Spool continued, “Whereas this isn’t excellent, it clearly demonstrates the flexibility of the Good Vaults to supply tailor-made threat fashions and to distribute customers’ funds amongst a number of yield sources.”
Cointelegraph bought an identical reply from SwissBorg, one other DeFi protocol that goals to assist customers restrict threat by means of diversification. SwissBorg CEO Cyrus Fazel said that the SwissBorg app has “completely different yield methods based mostly on threat/timeAPY.”
Some methods are listed as “1: core = low,” whereas others are listed as “2: adventurous = dangerous.” As a result of Euler was given a “2” ranking, losses from the protocol have been restricted to solely a small portion of SwissBorg’s complete worth locked, Fazel said.
SwissBorg head of engineering Nicolas Rémond clarified additional that the group employs refined standards to find out what protocols could be listed within the SwissBorg app.
“We have now a due-diligence course of for all DeFi platforms earlier than getting into any place. After which, as soon as we’re there, we’ve operation procedures,“ he stated, including, ”The due diligence is all about TVL, group, audits, open-source code, TVL, oracle manipulation assault, and so on. […] The operation process is about platform monitoring, social media monitoring and a few emergency measures. Some are nonetheless guide, however we’re investing to automatize every thing based mostly in order that we could be extraordinarily reactive.”
In a March 13 Twitter thread, the SwissBorg group said that though the protocol had misplaced 2.2% of the funds from one pool and 29.52% from one other, all customers could be compensated by SwissBorg ought to the funds not be recoverable from Euler.
The Euler assault was the worst DeFi exploit of Q1 2023. Fortunately, the attacker returned many of the funds, and most customers ought to find yourself with no losses when all is claimed and performed. However the assault raises questions on how builders and customers can restrict threat because the DeFi ecosystem continues to develop.
Some mixture of developer diligence and investor diversification will be the answer to the issue. However regardless, the Euler hack might proceed to be mentioned effectively into the longer term, if for no different cause than its sheer measurement and illustration of the dangers of DeFi exploits.
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