Perptual Futures DEX Faces Whale Attacks: Exploring Defense Mechanisms and Future Development

Recently, the cryptocurrency market witnessed a striking "Whale Attack" event. An address went long on ETH with 50x leverage on a certain Perptual Futures trading platform, with peak unrealized profits exceeding $2 million. Due to the massive position size and the transparent nature of DeFi, the entire market is closely watching this whale's next move.

Surprisingly, this trader did not choose to continue increasing their position or closing it for profit, but instead adopted a unique strategy. They withdrew part of the margin to secure profits while triggering the system to raise the liquidation price of the long position. Ultimately, the trader actively triggered the liquidation, making a profit of about 1.8 million dollars.

This operation had a significant impact on the platform's liquidity pool. The platform employs an active market-making mechanism to maintain the operation of the liquidity pool by charging funding fees and liquidation profits. Users can also provide funds to the liquidity pool. Due to the excessive profits of the Whale, normal liquidation could lead to insufficient counterparty liquidity. However, he chose to actively trigger liquidation, causing this portion of the loss to be borne by the liquidity pool. On March 12 alone, the platform's liquidity pool decreased by approximately 4 million dollars.

This incident highlights the severe challenges faced by decentralized exchanges for Perpetual Futures (Perp DEX), particularly the urgent need for innovation in liquidity pool mechanisms. Let's compare the mechanisms of several mainstream Perp DEXs and discuss how to prevent similar attacks.

Comparison of Mainstream Perpetual Futures DEX Mechanisms

Certain Perptual Futures trading platform A

Liquidity Provision: Adopting a community liquidity pool model, allowing users to deposit assets such as USDC to participate in market making. It also supports users to build their own capital pools to participate in market making profit sharing.

Market Making Model: Utilizing high-performance on-chain order book matching to provide an experience close to that of centralized exchanges. The liquidity pool acts as a market maker, placing orders on the order book to provide depth.

Liquidation Mechanism: Liquidation is triggered when the maintenance margin is insufficient. Any user with sufficient funds can participate in the liquidation and take over the problematic position. The liquidity pool also serves as a liquidation insurance fund, bearing the losses that may result from the liquidation.

Risk Management: Utilize multi-exchange price oracles, frequently updated to prevent single market manipulation. For large positions, some minimum margin requirements have been raised to 20%. Allow anyone to participate in liquidation to enhance decentralization.

Funding Rate and Position Cost: The long and short funding rates are calculated hourly to keep the contract price close to the spot price. For net positions that exceed the capacity of the liquidity pool, risk may be managed by adjusting margin requirements and funding rates.

a Perptual Futures trading platform B

Liquidity Provision: Utilize multi-asset liquidity pools that include mainstream cryptocurrencies and stablecoins. Users can participate in the liquidity pool by swapping assets and taking on leveraged trading risks.

Market Making Model: Innovatively adopts a liquidity pool to directly influence trading patterns, achieving a near-zero slippage trading experience through oracle pricing.

Clearing mechanism: An automatic liquidation system where the smart contract automatically closes positions at the oracle price when the margin rate falls below the maintenance requirement. The liquidity pool acts as the counterparty bearing the profit and loss.

Risk Management: Maintain contract prices close to spot prices through oracle to reduce internal manipulation risks. Limits can be set on the total position of a single asset, and dynamic borrowing rates can be used to suppress long-term unilateral positions.

Funding rates and position costs: Instead of using traditional funding fees, we use borrowing fees based on asset utilization rates. The longer the position is held or the higher the asset utilization rate, the more accumulated interest there is, effectively constraining long-term unilateral positions.

Certain Perptual Futures trading platform C

Liquidity Provision: Utilizing a multi-asset index pool model that includes mainstream cryptocurrencies and stablecoins. Users can deposit assets to participate in the liquidity pool, assuming all counterparty risks of the transactions.

Market Making Model: No traditional order book, trades are automatically matched through oracle pricing and liquidity pools. Use authoritative decentralized oracles to obtain market prices, achieving "zero slippage" trading.

Liquidation Mechanism: Automatic liquidation system that uses index prices to calculate position value. Liquidation is triggered when the margin ratio falls below the maintenance level, and the contract automatically closes the position.

Risk Management: Use multi-source oracles to reduce manipulation risks. Set a maximum position limit for easily manipulated assets. Limit leverage risk through a dynamic fee mechanism while incentivizing liquidity providers.

Funding Rate and Position Cost: Instead of using traditional funding fees, we use borrowing fees based on asset utilization rate. The fees are paid directly to the liquidity pool and increase with the asset utilization rate, effectively suppressing long-term one-sided crowded positions.

Conclusion: The Development Path of Decentralized Exchange for Contract Trading

This attack incident exposed the challenges faced by the Perptual Futures DEX, especially in terms of transparency and fixed rules. The attacker exploited a large position to profit while impacting the internal liquidity of the exchange.

To prevent similar attacks in the future, it may be necessary to focus on the following aspects:

1. Adjust the leverage multiple and margin requirements to limit the ability of a single user to open large positions.

2. Implement the Automatic Deductions (ADL) mechanism to limit losses by hedging profitable positions when the liquidity pool faces significant risks.

3. Strengthen address association analysis to prevent witch attacks, but balance the concept of decentralization.

4. Continuously increase liquidity depth to raise the cost of attacks and reduce the attractiveness of attacks.

Despite the challenges, these issues are also inevitable in the development process of Perptual Futures DEX. As the market matures and liquidity increases, such platforms are expected to better cope with risks and provide users with safer and more efficient decentralized derivatives trading services.