Formation Finance Flash Loan Vulnerability

Notice: This page is a freshly imported case study from the original repository. The original content was in a different format, and may not have relevant information for all sections. Please help restructure the content by moving information from the 'About' section to other sections, and add any missing information or sources you can find. If you are new here, please read General Tutorial on Wikis or Anatomy of a Case Study for help getting started.

Notice: This page contains sources which are not attributed to any text. The unattributed sources follow the initial description. Please assist by visiting each source, reviewing the content, and placing that reference next to any text it can be used to support. Feel free to add any information that you come across which isn't present already. Sources which don't contain any relevant information can be removed. Broken links can be replaced with versions from the Internet Archive. See General Tutorial on Wikis, Anatomy of a Case Study, and/or Citing Your Sources Guide for additional information. Thanks for your help!

Formation Finance

Formation Finance is a risk management service which offers synthetic products with particular risk profiles to help retail investors manage the risks in their profile. An unknown amount of money was taken from the liquidity pool smart contract hot wallet via a flash loan exploit. The situation was quickly noticed and stopped by the team through a modification of contract rates. It appears the amount taken was minimal, however the team does not appear to have announced how anything will be recovered.

This is a global/international case not involving a specific country.

About Formation Finance

"Smart Yield Farming 2.0. By adapting the three core principles from All Weather by Bridgewater for the yield farming environment, Risk Parity Protocol offers four classes of cross-chain yield-farming strategies."

"Formation Finance is an up-and-coming DeFi protocol aiming to use an innovation known as “cross-chain risk parity smart farming 2.0.” It’s designed to smooth and streamline the currently clunky user experience in DeFi while reducing overall risk exposure. Formation uses algorithms to select the optimal yield farming strategies tailored to a user’s risk tolerance, leveraging a vast range of assets across various blockchain platforms, including Ethereum, BSC, Polygon, and more."

"Risk parity algorithmically rebases the best performing farming strategies with a high degree of composability across major blockchain networks using the basic principles of the Risk Parity movement - achieved through algorithmic predictive intelligence."

"Through prioritizing secular diversification, the risk parity rebalancing mechanism sorts smart-asset allocation by pairing countertrend assets. This allows for iso-diversification construction to occur within our index coins to minimize risk fluctuations at a fundamental level - as it can detect levels of asset behaviors. Risk Parity Protocol rethinks and restructures how we interact with risks and it outperforms the most popular financially engineered strategies."

"When a user sets a level of risk with a minimum commitment amount determined by the algorithm in top reserve currencies such as BTC, ETH, DOT or BNB the protocol will automatically configure and recommend a chain-agnostic portfolio of yield farming strategies tailored for the risk profile of the user."

"On Saturday 20th November 2021, an attacker used an exploit on our network." "A hacker launched a flash loan attack to alter the price of the FORM token which the exploit contract excessively increases the value of the reward calculated at the withdrawal transaction."

"Some rewards from the liquidity pool were stolen." "We would like to reassure you that no investor funds, wallets or any information was affected, this was an exploit using a flash-loan only affecting the rewards pool."

"Farming contract has been using the balance of the pool for price discovery of the FORM token and LP token in order to calculate USD (stable coin) value of the position and pay rewards accordingly."

"Flash Swap mechanism allows to alter the price of the FORM token — the exploit contract used that in order to excessively increase the value of the reward calculated at the withdrawal transaction."

"(1) Stake LP token (transaction 1). (2) Pull available funds from the pool (alter the price of FORM token), unstake LP token and send back funds to the pool. (transaction 2)."

"[O]ur team reacted swiftly and effectively." "We were able to prevent this from happening by setting the multiplier to 0, which makes the contract send no FORMs for any new staked LP tokens." "[W]e had to disable parts of the platform to stop the attack. We are sorry for not communicating this effectively, but we had to act fast and stay ahead of the attacker."

"Only the rewards from the liquidity pool were affected. No investor funds, wallets or any information was affected." "Rest assured, this is not a huge issue as our team caught the attacker early and the loss was negligible, network hardening has been implemented and a solution is being deployed."

"Services are now being restored." "[W]e are pleased to announce that through our actions and the quick response from the dev team, we have identified the vulnerability and have been working hard to rectify and reinforce our systems and networks so that this never happens again."

This is a global/international case not involving a specific country.

The background of the exchange platform, service, or individuals involved, as it would have been seen or understood at the time of the events.

Include:

• Known history of when and how the service was started.
• What problems does the company or service claim to solve?
• What marketing materials were used by the firm or business?
• Audits performed, and excerpts that may have been included.
• Business registration documents shown (fake or legitimate).
• How were people recruited to participate?
• Public warnings and announcements prior to the event.

Don't Include:

• Any wording which directly states or implies that the business is/was illegitimate, or that a vulnerability existed.
• Anything that wasn't reasonably knowable at the time of the event.

There could be more than one section here. If the same platform is involved with multiple incidents, then it can be linked to a main article page.

The Reality

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.

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 - Formation Finance Flash Loan Vulnerability

Date	Event	Description
November 20th, 2021	Main Event	Expand this into a brief description of what happened and the impact. If multiple lines are necessary, add them here.

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?

Total Amount Lost

The total amount lost is unknown.

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?

Ultimate Outcome

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

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?

Ongoing Developments

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

Individual Prevention Policies

No specific policies for individual prevention have yet been identified in this case.

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

Platform Prevention Policies

Policies for platforms to take to prevent this situation have not yet been selected in this case.

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

Regulatory Prevention Policies

No specific regulatory policies have yet been identified in this case.

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