A smart crypto trader manipulated the price of the Avalanche tokens on GMX, a decentralized exchange (DEX), and netted more than $500,000 by using a strategy that exploited a rudimentary loophole, CoinDesk wrote.
Like many other DEXs, GMX uses smart contracts to connect traders directly, an essential feature of DeFi. The exchange makes it possible for users to trade spot and perpetual futures with low fees on a blockchain-based interface. Trading volume has exceeded $45 billion since it was founded in 2021.
Loophole: trading at zero slippage
GMX allows users to trade at zero slippage, which is the difference between the trade execution price and the expected trade price.
Savvy trader sold the initial position on GMX at a higher price
GMX gets all its pricing data from FTX, Binance, and other centralized exchanges (CEX), which would allow a user to purchase a large number of tokens at zero slippage and hike up the price on CEXs artificially.
This is exactly what happened: the trader bought a large number of AVAX, drove the price up by placing buy orders on the CEXs, and sold the initial position on the DEX at a higher price.
Interestingly, this strategy wouldn’t be profitable on two CEXs. A trader making high bids on one platform would result in prices going up on that exchange automatically. The other exchanges would increase the price of assets in their own systems immediately.
Experts weigh in
On Sunday Joshua Lim, head of derivatives at Genesis Trading, said the savvy crypto trader’s exploit of the GMX loophole was fivefold. His profit was in the range of $500,000 – $700,000 in total. Security firm PeckShield tweeted on Sunday that the gains amounted to $565,000.
According to Lim, each of the trader’s positions ranged from $4 million to $5 million, and he made away with more than $158,000 in the very first trade.
Solution late in coming
On Sunday evening, GMX developers said they were analyzing the loophole and expected a solution in two weeks. Meanwhile, they capped open interest for AVAX at $2 million on GMX. Open interest describes the number of unsettled futures contracts.
Amid a broader market drop, GMX’s eponymous native token lost just under 11% of its value today. Two-week losses extend to around one third according to the latest data.