Short and Snappy:
Defect in Chainlink Price Oracle Incites $500K DeFi Asset Liquidations as Cryptocurrency Market Dives
Chainlink Fiasco: Unusual Trade Nudges deUSD Over Peg, Triggers $500K+ Liquidations
- A bizarre trade induced Chainlink's oracle to erroneously report deUSD's price on Avalanche as $1.028, resulting in over $500,000 in forced liquidations on Euler Finance.
- This incident underscores the potential risks when standard oracle models cater to assets with limited liquidity.
- Critics question Chainlink's pricing model due to the 25-minute lag between the Ethereum trade and the Avalanche oracle update and the use of the volume-weighted average price (VWAP) on thinly traded pools.
- DeFi influencer Omer Goldberg raises concerns about the VWAP's susceptibility to exploitation in illiquid environments, with a single manipulated trade distorting the price feed.
- As scepticism mounts, Chainlink's LINK plunges by over 7%, corroborating with market-wide downturn.
Chainlink's Oracle Meddle On Avalanche Triggers Unwanted Liquidations
Amid the May 29 turmoil, Chainlink's oracle on Avalanche bizarrely inflated deUSD's price by 2.8%, exceeding its $1 benchmark and striking fear as automatic liquidations for users holding deUSD were unequivocally executed.
Though the incorrect Avalanche oracle update came at block 62918673, the triggering Ethereum trade had actually occurred 25 minutes earlier. Surprisingly, Avalanche deUSD/WAVAX pool records, prior to the oracle change, exhibited no irregularities.
Multiple oracle feeds, unfortunately, echoed the same erroneous data, leaving the root cause of the anomaly bewildering, as the onchain pools did not reflect any deviations until post the price update.
Oracle Pricing Strategy under Scrutiny
DeFi proponent Omer Goldberg slammed the delay and the method behind Chainlink's price feed. He highlighted the 25-minute gap between the Ethereum-based trade and the Avalanche oracle update, branding it as contrary to Chainlink oracles' asserted real-time, resilient pricing claims.
Goldberg also questioned the wisdom of leveraging volume-weighted average price (VWAP) in thinly-traded pools. He punctuated that a singular large trade in Curve's deUSD/USDT pool significantly influenced the result, making the pool an inadequate pricing reference. He further urged Chainlink to explore liquidity-weighted pricing or cap mechanisms, like Aave, to bolster their protocol's security.
LINK Nosedives Amid Market's Slump
Amid the mounting alarm, Chainlink's native token, LINK, is plummeting in tandem with the broader crypto market. In a 24-hour spree, LINK dropped over 7%, accompanied by a larger 10.36% dip in just a week.
Background
- Chainlink's volume-weighted average price (VWAP) system utilizes data from various exchanges and pools, eventually calculating an average price weighted by trading volume to provide a more reliable market value for assets [1][5][3].
- In stable and liquid markets, this approach offers robust price feeds, but when markets are volatile or finicky, it emerges as questionable. Egregiously thin markets can see a single pool or exchange dominate trading activity - if a significant trade or sudden price hike occurs in a slender market, it can significantly bias the VWAP for that temporal period [1][2][5]. During these situations, the VWAP calculation may accurately represent the accessible market data, but the deficiency in depth means the reported price is not indicative of broader market dynamics.
- Critics argue that relying on VWAP in illiquid environments presents opportunities for exploitation, as anomalous or manipulated trades can deckew the price feed [1][2][5]. Chainlink's standpoint is that they merely aggregate and onchain available market data; it is the responsibility of individual protocols to implement additional checks or limits to safeguard against edge cases [1][2]. This underscores a significant limitation: while Chainlink’s VWAP system can prove highly reliable in liquid markets, its reliability deteriorates when markets are volatile or afflicted by scarcity, unless additional safeguards are implemented by the protocols utilizing its data.
[1] Cooper Turley (2021, June 11). What Happened to Chainlink? Ava Labs Reveals Cause of deUSD Failure. The Defiant. https://defiantnews.io/what-happened-to-chainlink-avalabs-reveals-cause-of-deusd-failure/[2] Dean Rieux (2021, June 1). Ethereum Gas Price Outrages: A Brief Overview. Trustnodes. https://www.trustnodes.com/2021/06/01/ethereum-gas-price-outrages-a-brief-overview[3] Slater Dean (2021, May 31). Is Chainlink set to recover after $1 billion liquidation scare? Cointelegraph. https://cointelegraph.com/news/is-chainlink-set-to-recover-after-1-billion-liquidation-scare[5] Bbeat (2021, May 31). What Caused DAO crypto library to freeze a billion dollars and what does it mean for DeFi users and investors. Benzinga. https://www.benzinga.com/news/2021/05/31/what-caused-the-dao-crypto-library-to-freeze-a-billion-dollars-and-what-does-it-mean-for-defi-users-and-investors/
Questioning the Security of Chainlink's Oracle Pricing Amid Liquidation Incidents
As concerns mount regarding Chainlink's oracle system following the bizarre price inflating incident on Avalanche, DeFi proponents are raising queries about the security of the volume-weighted average price (VWAP) strategy.
Amid the ongoing investigation, it has been revealed that the 25-minute delay between the Ethereum trade and the Avalanche oracle update may have exposed Chainlink's oracles to manipulation, especially in thinly-traded pools where a single large trade can significantly impact the VWAP.
In light of the recent events, it is crucial for Chainlink to reconsider their pricing strategy, potentially adopting liquidity-weighted pricing or cap mechanisms, similar to Aave, to bolster the resilience and security of their oracles in various market conditions.
