CURVE FINANCE

DESCRIPTION OF EVENTS

"Curve is a decentralized, UniSwap-like exchange for stablecoins. By focusing on stablecoins, it’s able to offer traders extremely low slippage, and liquidity providers enjoy little-to-no impermanent loss." "As is the case with many other decentralized finance protocols, Curve wasn’t fully decentralized at launch, run by the Curve team, led by Michael Egorov, the founder of NuCypher with a Ph.D. in Physics."

"Curve supports DAI, USDC, USDT, TUSD, BUSD and sUSD, as well as BTC pairs, and it lets you trade between these pairs extremely quickly and efficiently. When stablecoins or stable assets are involved, Curve’s prices are usually the best in the business."

“The key aspect of Curve is its market-making algorithm, which can provide 100-1000 times higher market depth than Uniswap or Balancer for the same total value locked. This dynamic helps both traders and liquidity providers because fundamental returns for those are higher than on Uniswap and alike by the same factor as the market depth.”

"Mochi, a platform similar to asset-backed stablecoin issuers Spell and MakerDAO, gave users incentives to deposit assets in a Curve pool that included USDC, USDT, DAI and Mochi’s native stablecoin USDM leading into Wednesday night’s events, ultimately attracting over $170.2 million in liquidity at its peak, according to Azeem." The "[p]rice oracle for $mochi is literally just a number set by a hot wallet. The mochi token is upgradeable by a 1-of-3 multisig ("multisig") with no timelock. The same multisig owns 99.5% of all mochi." "Whereas Curve Finance reports that Mochi’s USDM factory pool reached $100 million in liquidity, other sources suggest that the pool reached $170 million in total value locked (TVL)."

"A final key cog in the events is Convex Finance. Convex is a protocol designed to maximize CRV rewards, and the protocol is now the largest veCRV holder with 136.58 million tokens, which is more than a third of CRV’s circulating supply. Users who lock Convex’s CVX token have the right to vote proportionally on how the protocol’s tokens are used for boosting the rate of rewards."

"On Wednesday night, a young project – memecoin-flavored Mochi Inu – executed a series of transactions that tilted CRV rewards in its favor by using a token-locking mechanism in Convex Finance, a yield farming protocol built on top of Curve." "This jockeying for CRV emission rewards is a common practice among protocols and is often referred to as the “Curve Wars.”" "The USDM stablecoin protocol Mochi launched a governance attack against the stablecoin transaction protocol Curve, caused USDM liquidity users to face a loss of $46 million."

"Last night, some unusual price action on CVX was brought to our attention. This came from an address which had just swapped 46M USDM to DAI in a factory pool 144. After some research, along with Yearn and Convex, we realised those were the actions of the person behind the Mochi protocol."

"The Mochi project party purchased Convex’s CVX tokens, voted to increase the USDM pool reward to increase the liquidity of USDM and other assets, and then exchanged the large amount of USDM tokens owned by the project party into DAI after the liquidity increased."

"Mochi used bribes in their own token (MOCHI) to vote in a gauge receiving CRV. Mochi incentivised votes to its gauge via Convex until the factory pool reached $100m liquidity. Mochi minted a huge amount of tokens to themselves 105, Mochi has no minting cap or tokenomics. Deposit those tokens onto the MOCHI which has a custom price oracle set by the Mochi team 64 (meaning the Mochi team could mint as many tokens as they wanted if there was enough liquidity to trade it for stables that aren’t backed by air) and 90% LTV and mint $46m USDM."

"Swap those USDM to DAI on Curve. Use those DAI to purchase Ethereum and ultimately buy 1.05m CVX 37. At that point, several people aware of the situation including Andre Cronje and myself tried to warn Mochi against locking those CVX as they would have been in a position to unfold their position and make LPs of that pool whole if the acquired CVX had remained liquid. Mochi eventually locked the CVX."

"Few more bits about Mochi and findings: 99.5% of the circulating supply is owned by “the team”. This likely means USDM undercollaterized. There are serious security and decentralization conderns with Mochi and Azeem. Those newly purchase CVX wil likely be used to give the USDM pool more incentive eventually creating more liquidity for the Mochi team to sell their undercollaterized USDM to LPs unaware of the situation."

"As this constitutes a clear governance attack and the emergency DAO deemed the LPs in that pool to be at risk, the emergency DAO agreed to kill the gauge so it stops receiving CRV emissions immediately. Those locked CVX would undoubtedly be used to deepen liquidity in the USDM pool to recreate the attack with Curve LPs left holding the bag and we urge Convex governance to take action against Mochi."

"In an interview with CoinDesk, Banteg, a pseudonymous Yearn core contributor and one of the nine members of the Curve Emergency DAO, said the flywheel was dangerous given USDM’s dubious backing."

“Internal thinking was around mitigating the feedback loop Andre described when he first drew attention to the issue. With high concentration of votes towards one pool, it could cut into other pools, ultimately hurting Curve [liquidity providers],” Banteg said. “We know for a fact USDM is a worthless collateral. In retrospect, Curve DAO should’ve done a better due diligence on it.”

"Shortly after the transactions, however, the Curve Emergency DAO, a nine-person group using a multisignature scheme with limited governance powers over CRV reward emissions, cut off Mochi’s rewards, and in a governance forum post, semi-anonymous Curve contributor Charlie wrote that Mochi’s overnight actions were a “clear governance attack.”"

"Nonetheless, the decision from the decentralized autonomous organization, or DAO, has prompted much community debate, as some have argued that the protocol should not single out any one user and that blacklisting another protocol runs against DeFi’s open, permissionless ethos."

"This is a good reminder that blindly accepting money from protocols for gauges or veCRV weight is a risky business especially with anyone being able to deploy Curve pools in the factory. Permisionless pool factories and permisionless gauges are meant to empower governance which comes with serious responsibilities."

“Curve definitely doesn’t want to be gatekeepers or protectors, but we gotta draw the line somewhere when it comes to bad behavior. Mochi crossed it seven times over last night.”

Curve Finance provides liquidity pools especially tailored for stablecoins. The Mochi protocol has a stablecoin USDM which could be freely minted by the team. They used incentives to gain liquidity in their pool, minted additional Mochi, used the Mochi to mint USDM, swapped the USDM to DAI, then swapped the DAI to CVX. The CVX could then be used to vote for higher incentives, creating more liquidity allowing the process to be repeated. The Twitter account associated with project leader Azeem has apparently since been deleted.

HOW COULD THIS HAVE BEEN PREVENTED?

Curve Finance functions as a large smart contract hot wallet, which subjects the assets to potential ongoing risks. A treasury, industry insurance fund, or smart contract insurance, should be set up to protect all investors against black swan events. One option is to place some assets in cold storage to reduce the risk.

Check Our Framework For Safe Secure Exchange Platforms

https://blog.insurace.io/security-incidents-in-november-e4bcb39dd7f9 (Feb 1)
The Curve Emergency DAO has killed the USDM gauge - Proposals - Curve.fi Governance (Feb 7)
Curve.fi (Feb 7)
Curve.fi (Feb 7)
https://etherscan.io/tx/0x644175b12d414424a5ac020f646b8d4f083ece0ed544b919ac29265e4e87e0f3 (Feb 7)
@boredgenius Twitter (Feb 7)
https://etherscan.io/tx/0x938fbfa11faf7692fd4b422a5ba056d06fbcbe3d62bb0eb3e4b579ea5dd4ea33 (Feb 7)
https://etherscan.io/address/0x0c3a1a43392f06347aa8fea1852b4ba068443a0d#tokentxns (Feb 7)
https://etherscan.io/tx/0x36b01f18f1f6789c39d7694047e7f4427c11d67b115a1baf30663600a2c2bad8 (Feb 7)
https://etherscan.io/token/0x60ef10edff6d600cd91caeca04caed2a2e605fe5#balances (Feb 7)
@boredGenius Twitter (Feb 7)
https://twitter.com/AZtztk (Feb 7)
Curve Blocks Mochi After Alleged Attempted Governance Attack - Crypto Briefing (Feb 7)
‘Curve Wars’ Heat Up: Emergency DAO Invoked After ‘Clear Governance Attack’ (Feb 7)
@MochiDeFi Twitter (Feb 7)
@dcfgod Twitter (Feb 7)
@AndreCronjeTech Twitter (Feb 7)
@CurveFinance Twitter (Feb 7)
@Mudit__Gupta Twitter (Feb 7)
Mochi's Governance Attack on Curve | DeFi on Bitcoin? Taproot Soft Fork Activated - YouTube (Feb 7)
Explained: The Mochi Inu Governance Hack (November 2021) (Feb 7)
‘Curve Wars’ Heat Up: Emergency DAO Invoked After ‘Clear Governance Attack’ (Feb 7)
https://coinmarketcap.com/alexandria/article/curve-wars-and-the-emergency-dao (Feb 7)
@CurveFinance Twitter (Feb 7)
Curve blocks Mochi after alleged governance attack attempt - TittlePress (Feb 7)
Curve Blocks Mochi After Alleged Attempted Governance Attack - News RapperDoge Coin (Feb 7)
Review the "governance attack" of curve finance by USDM team (Feb 7)

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