The decentralized exchange (DEX) GMX has fallen victim to an exploit by a large and sophisticated trader who reportedly was able to “siphon all the liquidity” from its avalanche (AVAX) market and profit from the manipulated price.
According to multiple threads posted on Twitter by leading members of the crypto community, the price of AVAX was manipulated by a large “whale” who first took a multi-million-dollar position in AVAX on GMX, and then manipulated the price higher on other exchanges.
According to some sources, the trader made up to $1m by doing this, while others claim the profit from the market manipulation was only about half of that.
GMX differs from most other exchanges – both centralized and decentralized – in that it has a special feature that lets users avoid slippage, even for large orders.
In trading, slippage is the difference between the price a trader thinks he will get and the one he actually gets when the trade is executed. On all exchanges, large orders in particular can cause slippage, as there sometimes isn’t enough liquidity available at the best market price to accommodate the entire order. In particular, this can be a problem for smaller tokens with little trading volumes.
On GMX, the exchange promises that the spot price in its market will not change no matter how large of an order is placed in the market, thus letting the user avoid slippage. Consequently, the trader who exploited the exchange was able to take a large position in AVAX without affecting the price, before then driving up the price of the same token on another exchange.
AVAX has relatively low liquidity compared to major cryptoassets like bitcoin (BTC) and ethereum (ETH), which also makes it easier for large traders to manipulate its price.
Warnings from the community
Notably, some voices in the community did warn about the possibility of an exploit on GMX, given that no other major exchanges operate on a similar model. Among those who voiced concern was Taureau, the pseudonymous founder of the competing DEX Zigzag, who in a recent podcast interview said GMX’s no-slippage model “sounds kind of insane.”
“I’m a little skeptical that the GMX model can last,” Taureau said in the podcast, referring to a situation where larger and more sophisticated traders come in to take advantage of GMX’s no-slippage system.
The problem with relying on a no-slippage system was also pointed to by others, with one Twitter user saying the system opens the exchange up for “price manipulation exploits:”
The price manipulation happened between 1am and 2:20am UTC on Sunday, and can clearly be seen on shorter timeframe charts such as Binance’s 1-minute chart:
As of press time at 15:30 UTC, AVAX traded at $17.19, down 5.2% for the past 24 hours and down 16.5% for the past 7 days.
This article was originally published on cryptonews.com