Protection against rerange arbitrage attacks?

General Discussion
#1

Hello Isvikingers,

with the concept of Concentrated Liquidity in Automated Market Makers, the Impermanent Loss is converted into Permanent Loss at every rerange.

Whenever a Fragola pool is getting close to the rerange threshold, I am affraid an attacker could push the tokens ratio to trigger a rerange; thus creating an arbitrage opportunity at the expense of Fragola liquidity providers. I understand Fragola is protected at the moment because reranges are still triggered manually, and the Max Caps are still low. But reranges will eventually be automated and Max Caps lifted in a near future.

Fortunately, we are still at the infancy stage of Concentrated Liquidity on AMM’s so taking this risk into account while developing should already be a good strategy. For example, hardcoding the rerange thresholds (eg: trigger a rerange at 75%/25%) sounds like a bad idea; and randomizing the thresholds would kill the strategies that made Fragola more profitable than its competitors…

I have no solution to offer but I’d be happy to read your comments on this topic.

zazka

1 Like
#2

There is two directions of protection:

  • Time entropy. Delay re-balances, trigger them manually, to make it harder to exploit them.
  • Space entropy. Route re-balances through aggregators like 1inch, to spread liquidity through all DEXes, PMMs and OTC markets
    And all transactions should be secured through flashbots or smth like this.
2 Likes
#3

Hello @Bumbr,

Your space entropy idea is a very nice one! In fact in understand that rerange transactions basically:

1- withdraw enough tokens to be swapped to get back in range
2- swap them
3- deposit back in the pool to get back in range

So swaping on an external venue shouldn’t be very hard to implement (just modify the swap step).

Your idea would also considerably increase the profitability. Let me explain. I saw the price impact when swaping to rerange has generated many losses in Fragola pools. When a Fragola pool owns 5% of the liquidity of a UNI-V3 pool, there is still 95% of the capital of the other liquidity providers (those who provide liquidity directly in UNI-V3) to be used for the swap. Now imagine what happens when PLP leverage is implemented and Max Caps are lifted! if Fragola owns 40% of a pool, there will be only 60% of capital left to do the swap, thus leading to huge price impact. Technically, this is not 100% correct because Fragola doesn’t withdraw 100% when swaping for reranges. But you get the idea…

So effectively, I don’t really see how we could use leverage and lift Max Caps without implementing your idea.

Cheers,
Zazka