Lodestar Finance Collateral Price Manipulation

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Lodestar Finance

Lodestar Finance is a decentralized borrowing and lending protocol designed for the Arbitrum community. The platform allows users to earn interest on their assets by supplying them to the protocol and collateralizing their deposits. The protocol is based on Compound and has made modifications to support Arbitrum, DPX, MAGIC, and plvGLP. It relies on Chainlink Oracles for accurate pricing, except for plvGLP. Recently, Lodestar fell victim to an attack where an attacker manipulated the plvGLP price reported by the GLPOracle contract, resulting in the draining of the lending pools and a profit of approximately $6.5 million. The incident caused a significant drop in the token price and total value locked (TVL). As of now, no plans for reparations have been announced.

About Lodestar Finance

Lodestar Finance is an algorithmic borrowing and lending protocol focused on decentralized money markets in Arbitrum communities. It aims to provide decentralized lending services to emerging communities like Treasure, Dopex, and Plutus, benefiting token holders and DAOs. The platform allows users to earn interest by supplying assets like MAGIC, DPX, and plvGLP to the protocol and collateralizing their deposits. It enables borrowing of crypto assets, access to liquidity without triggering taxable events, and leveraged trading strategies. Lodestar plans to partner with more communities as the Arbitrum ecosystem evolves, aiming to support layer 2 native communities that lack access to critical DeFi infrastructure. One of its collateral assets is plvGLP, which represents locked GLP from Plutus DAO. Built as a Compound fork, Lodestar has added code to support changes, including Arbitrum integration, support for DPX, MAGIC, and plvGLP, modifications to interest models, and other adjustments.

Bug Bounty And Crowd Audit

Lodestar Finance reportedly held a crowd audit and bug bounty competition.

To further bolster our security measures, we have implemented a crowd audit and bug bounty competition in partnership with Hats Finance (https://hats.finance/). This program invited security researchers and white-hat hackers to review our code and identify any potential vulnerabilities to earn bounties. No critical bug putting funds at risk was reported, while 18 medium improvements were reported and 2 gas optimisations

The Reality

"The Lodestar docs state that:" "we are relying on Chainlink Oracles for accurate pricing (with the exception of plvGLP)"

"Manipulating the price of collateral has been a popular attack technique since the beginning of DeFi, but especially in recent times, as this incident follows the attacks on both Mango and Moola Markets, who lost $115M, and $8.4M respectively, in October."

"343 ETH ($430k) necessary for the attack was bridged from Polygon three months ago."

This sections is included if a case involved deception or information that was unknown at the time. Examples include:

• When the service was actually started (if different than the "official story").
• Who actually ran a service and their own personal history.
• How the service was structured behind the scenes. (For example, there was no "trading bot".)
• Details of what audits reported and how vulnerabilities were missed during auditing.

Security Disclaimer

The Lodestar Finance team provides a disclaimer on their Security page, however it is not clear if this was added before or after the exploit occurred.

Caution should be exercised when interacting with any smart contract or blockchain application. There is always risk of vulnerabilities in smart contract code, and while the codebase we launching with is incredibly battle-tested and we are relying on Chainlink Oracles for accurate pricing (with the exception of plvGLP), there are still always risks. We have attempted to mitigate them through extensive unit and integration testing, leaning on the community for beta testing, along with ongoing bug bounties, but there is still always going to be an inherent smart contract risk and market risks while using the protocol.

What Happened

The specific events of the loss and how it came about. What actually happened to cause the loss and some of the events leading up to it.

Key Event Timeline - Lodestar Finance Collateral Price Manipulation

Date	Event	Description
December 10th, 2022 9:43:26 AM MST	Exploit Transaction	One of the exploit transactions on the blockchain. TBD further analysis.
December 10th, 2022 2:03:00 PM MST	Solidity Finance Report	Solidity Finance publishes a technical analysis of the exploit on Twitter.
December 10th, 2022 2:14:00 PM MST	Lodestar Finance Report	Lodestar Finance reports on Twitter that they've set all interest rates to 0 while they weight options. They also provide some details on the exploit which occurred.
December 11th, 2022 1:24:00 AM MST	CertiK Incident Report	. TBD
December 12th, 2022	Rekt Publishes Article	Rekt publishes an article on the situation.

Technical Details

This section includes specific detailed technical analysis of any security breaches which happened. What specific software vulnerabilities contributed to the problem and how were they exploited?

Exploiter Address:

"Using flash loans, the attacker manipulated the plvGLP price reported by Lodestar’s GLPOracle contract, allowing them to “borrow” all the funds supplied on the platform." "[T]he attacker [drained] their lending pools for a profit of ~$6.5M."

"Solidity Finance summarised the root cause: The GLPOracle did not properly take into account the impact of a user calling donate() on the GlpDepositor contract, which inflates the assets of the GlpDepositor contract, and therefore the oracle-delivered price of the plvGLP token."

Solidity Finance Technical Analysis

Solidity Finance published a technical analysis of the exploit:

@LodestarFinance has suffered an exploit as a result of an 8-figure flash loan attack.

We have been investigating and discussing with them & the @PlutusDAO_io team, as Plutus was used in the exploit, but not exploited.

The root cause of the exploit comes down to the way the Lodestar GLPOracle was constructed; specifically how it obtained the price of plvGLP.

The GLPOracle did not properly take into account the impact of a user calling donate() on the GlpDepositor contract, which inflates the assets of the GlpDepositor contract, and therefore the oracle-delivered price of the plvGLP token.

The attacker flashborrowed a large sum of funds and manipulated the price on the GLPOracle to increase the value of their collateral far beyond realistic values.

As a result of this they were able to borrow more than they should have based upon the true value of their collateral.

In this case, the attacker borrowed nearly all of the assets on the platform, leaving the protocol with bad debt.

These events highlight that utilizing oracles resistant to manipulation is a critically important piece of DeFi, especially in protocols which lend out user assets.

Lodestar Finance Technical Analysis

The Lodestar Finance tweet announcing the breach included a technical analysis:

Protocol was exploited and deposits have been drained. We have set all interest rates to 0 so that supply and borrow balances are not moving while we weigh recovery options. What we know right now:

1. An attacker manipulated the exchange rate of the plvGLP contract to 1.83 GLP per plvGLP, an exploit that by itself would be unprofitable.

2. They supplied plvGLP collateral to lodestar and borrowed all available liquidity.

3. They cashed out what they could but our collateralization ratio mechanism prevented them from fully cashing out the plvGLP.

4. After the hack several plvGLP holders also took advantage of the opportunity and also cashed out at 1.83 glp per plvGLP.

5. The hacker burned a little over 3 million in GLP, their profit on this exploit was the stolen funds on Lodestar - minus the GLP they burned.

6. 2.8 Million of the GLP is recoverable, which is worth about $2.4 million. We are going to reach out to the hacker and see if we can negotiate a bug bounty to recover more funds.

7. If you are the hacker, we will be reaching out to you on Debank at these 3 addresses:

Total Amount Lost

Exploiter Address:

The total amount lost has been estimated at $6,500,000 USD.

How much was lost and how was it calculated? If there are conflicting reports, which are accurate and where does the discrepancy lie?

Immediate Reactions

How did the various parties involved (firm, platform, management, and/or affected individual(s)) deal with the events? Were services shut down? Were announcements made? Were groups formed?

"The incident saw the token LODE dump by ~70% and TVL drop to just $11."

"Following the exploit, the funds were swapped to ETH, bridged back to mainnet and dispersed to multiple addresses."

Twitter Reactions

The events were used to discredit blockchain in general.

If you play with criminals, you get crimed. It should have been abundantly clear 10 years ago that crypto is a haven for criminals. Cut your losses. Get out of that business, find something else... like tulips. At least if they go bust you'll still have the flowers.

Ultimate Outcome

What was the end result? Was any investigation done? Were any individuals prosecuted? Was there a lawsuit? Was any tracing done?

"two days have now passed since the initial attack on Lodestar, and no mention of any planned reparations has yet been made."

Bug Bounty And Crowd Audit

Lodestar Finance reportedly held a crowd audit and bug bounty competition. This was not present on their original security page.

To further bolster our security measures, we have implemented a crowd audit and bug bounty competition in partnership with Hats Finance (https://hats.finance/). This program invited security researchers and white-hat hackers to review our code and identify any potential vulnerabilities to earn bounties. No critical bug putting funds at risk was reported, while 18 medium improvements were reported and 2 gas optimisations

There is also reports that the team is considering a bug bounty through ImmuneFi.

Disclaimer Embellished

The disclaimer in the Lodestar Finance security page was embellished to add new terms against liability and that US-based individuals are restricted from participating.

This protocol is offered as is without warranty. All smart contract-based apps carry inherent risks, and you alone are responsible for the consequences of these risks. By entering the app you agree that you understand these risks, including the potential to lose your entire deposit and further agree to release Lodestar and hold it harmless from all potential claims based on Lodestar's own negligence. All persons from OFAC sanctioned nations are barred from using any Lodestar service. All US persons are barred from staking related services. By entering the app you are asserting that you are compliant with these restrictions and acting lawfully according to your local jurisdiction.

Smart Contract Audit Obtained

Lodestar Finance ultimately obtained an audit from Solidity Finance.

Total Amount Recovered

There do not appear to have been any funds recovered in this case.

What funds were recovered? What funds were reimbursed for those affected users?

"two days have now passed since the initial attack on Lodestar, and no mention of any planned reparations has yet been made."

Ongoing Developments

What parts of this case are still remaining to be concluded?

Individual Prevention Policies

Avoid the use of smart contracts unless necessary. Minimize the level of exposure by removing or withdrawing assets whenever possible. Aim to choose smart contracts which have obtained third party security audits, preferably having been audited by at least three separate reputable firms. Pay attention to the audit reports, which smart contracts are covered, and whether the smart contract has been upgraded or modified since the report. Ensure that any administrative functions with the ability to remove funds from the smart contract are under the authority of a multi-signature wallet which is controlled by at least three separate and reputable entities.

For the full list of how to protect your funds as an individual, check our Prevention Policies for Individuals guide.

Platform Prevention Policies

All aspects of any platform should undergo a regular validation/inspection by experts. This validation should include a security audit of any smart contracts, reporting any risks to the backing (of any customer assets, ensuring treasuries or minting functions are properly secured under the control of a multi-signature wallet, and finding any inadequacies in the level of training or integrity of the team. The recommended interval is twice prior to launch or significant system upgrade, once after 3 months, and every 6 months thereafter. It is recommended that the third party performing the inspection not be repeated within a 14 month period.

For the full list of how to protect your funds as a financial service, check our Prevention Policies for Platforms guide.

Regulatory Prevention Policies

All platforms should undergo published security and risk assessments by independent third parties. Two assessments are required at founding or major upgrade, one after 3 months, and one every 6 months thereafter. The third parties must not repeat within the past 14 months. A risk assessment needs to include what assets back customer deposits and the risk of default from any third parties being lent to. The security assessment must include ensuring a proper multi-signature wallet, and that all signatories are properly trained. Assessments must be performed on social media, databases, and DNS security.

For the full list of regulatory policies that can prevent loss, check our Prevention Policies for Regulators guide.