Investigate Market Manipulation Risk in ZRX and Other Tokens

Ideas
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The Mango Markets manipulation from yesterday also seems to indicate that liquidity attacks represent a real risk to the protocol.

In this case the attack worked somewhat differently from attack described above in OP. General process (slightly different due to use of perps, but this would be the equivalent for spot liquidity market like Compound):

  1. Deposit stablecoins or other hard collateral with high collateral factor in account A
  2. Borrow/short low liquidity asset XYZ from account A
  3. Transfer XYZ from account A to account B and deposit as collateral
  4. Purchase a lot of XYZ across DEX/CEX to push price up significantly
  5. (optional) Deposit additional purchased XYZ to account B
  6. Account A may be pushed into liquidation, causing further upwards price pressure on XYZ
  7. Borrow hard assets (stablecoins, ETH, etc) at max LTV from account B using inflated value of XYZ collateral

If amount borrowed in step 7 (XYZ collateral * price * collateral factor) is greater than sum of collateral provided in account A (step 1) and cost of purchased XYZ (step 4), then the attack will generate a profit. The largest risk factor for an attack like this being profitable is illiquidity of a prospective target XYZ asset - this would allow the an attacker to move the price up significantly with relatively smaller amount of capital. Secondary risk factors include collateral factors for XYZ asset and of other hard collateral assets that could be used to borrow XYZ.

I’m working on a proposal that I think could reduce risk of these sort of liquidity attacks, while having minimal impact on capital efficiency and UX of regular / non malicious users. Hope to share more soon!

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