The crypto market has had its fair share of ups and downs in recent years, but it’s been nothing like this week. On Wednesday, the price of Matic tokens dropped 35% after a flash loan attack was detected by Binance. The hack involved borrowing funds without collateral through dYdX’s platform and selling off tokens before others could react. Smart traders who were aware of the potential risk were able to get out before they suffered any losses while others may have not been so lucky.
A “flash crash” refers to a sudden and unexpected drop in the price of an asset over a short period of time. The term is used most commonly in reference to stock markets, but can also apply to other forms of trading.
Matic Sense Trouble
In crypto trading, a flash crash is often the result of technical issues with exchanges or margin trading platforms that cause market orders to be filled at extremely low prices until they’re eventually canceled by the exchange.
The riskiest part about flash crashes is that they often occur without warning, so even savvy traders can be caught off guard by them. These events have become more common since 2017 when Bitcoin’s price skyrocketed over $20K and crashed down into the low $6K range within minutes before recovering its value hours later.
To perform the attack, the bad actor used a DeFi platform dYdX’s flash loan feature. The borrower can borrow funds with no collateral and pay a premium interest rate if they agree to sell their crypto assets at the time of maturity.
The attacker bought MATIC tokens on Sept. 4 and 5, when prices were around $0.30-$0.35 apiece (see chart below). When they were able to sell them back at $1 per token, they made an easy $700 profit in less than 24 hours — despite having taken out two flash loans from dYdX and paying a total of over $1 million in fees!
This type of scheme is called front-running, which basically means that someone is able to get ahead of others’ orders for goods or services before those orders are executed by the person who took them out originally (in this case: an exchange). In this case it was because the bad actor knew about an impending price drop before anyone else did; however there are other ways to perform front running such as using insider knowledge or simply being faster than everyone else online overall.
