Introduction

In decentralized finance (DeFi), flash loan exploits can significantly affect lending platforms. These attacks exploit vulnerabilities to manipulate liquidity pools and profit from arbitrage, leading to significant financial loss and instability in the protocol. This demo shows how an incident involving a flash loan exploit by a lending protocol like Aave and how a trap contract AaveFlashLoanTrap can help detect and mitigate such attacks using an automated pause functionality

Incident Overview

A flash loan exploit involves borrowing a large amount of liquidity from a protocol without collateral, exploiting vulnerabilities in the protocol to profit from arbitrage, and then repaying the loan within the same transaction. This can lead to drastic changes in liquidity and manipulate asset prices.

Aave Flash Loan Trap

Concept

The AaveFlashLoanTrap is designed to monitor lending platforms for significant changes in liquidity that could indicate a flash loan exploit. By collecting and analyzing liquidity data, it can detect abnormal changes and trigger a pause in the protocol to prevent further damage.

How the Trap Detects and Prevents Attacks

Data Collection:

The trap contract periodically collects liquidity data from the Aave-like protocol. This data is crucial for detecting any sudden changes in the protocol's state.

Validation:

The collected data points are compared to detect significant drops in liquidity. If a decrease greater than the predefined threshold (10% in this case) is detected between two consecutive data points, it indicates a potential attack.

Response:

If an anomaly is detected, the isValid function triggers the protocol's pause function. This halts all operations, preventing further exploitation and allowing the protocol's developers to investigate and mitigate the issue.

The Importance of Pause Functionality

The inclusion of a pause functionality is critical for the following reasons:

Immediate Response:

To integrate this trap into any Aave-like protocol, the protocol should implement a pause function that can be called by the trap contract upon detecting an anomaly
Automatically pausing the protocol upon detecting an attack prevents further damage.

Investigation and Mitigation:

Pausing operations gives developers time to investigate the cause and apply necessary fixes without the risk of ongoing exploitation.

Community Trust:

Demonstrates a proactive approach to security, helping maintain user trust in the protocol.

Running the Examples

forge test

Test Results

Ran 3 tests for test/AaveFlashLoanTrapTest.t.sol:AaveFlashLoanTrapTest
[PASS] testCollect() (gas: 19463)
Logs:
  Setup completed: AaveLikeProtocol deployed with liquidity 1000 and AaveFlashLoanTrap deployed.
  Collected available liquidity: 1000
[PASS] testIsValid() (gas: 35922)
Logs:
  Setup completed: AaveLikeProtocol deployed with liquidity 1000 and AaveFlashLoanTrap deployed.
  Data points set: [1000, 850]
  Calling isValid...
  decreasePercentage:  15
  isValid result: false
  Checking if protocol is paused...
  Protocol paused:  true
[PASS] testIsValidWithNoPause() (gas: 28137)
Logs:
  Setup completed: AaveLikeProtocol deployed with liquidity 1000 and AaveFlashLoanTrap deployed.
  Data points set: [1000, 950]
  Calling isValid...
  decreasePercentage:  5
  isValid result: true
  Checking if protocol is paused...
  Protocol paused:  false
Suite result: ok. 3 passed; 0 failed; 0 skipped; finished in 2.26ms (1.29ms CPU time)

Conclusion

Flash loan exploits pose a significant threat to the stability and security of decentralized lending platforms. By employing the AaveFlashLoanTrap, protocols can detect abnormal liquidity changes indicative of such attacks. This trap operates by periodically collecting liquidity data, validating it against predefined thresholds, and triggering an automatic pause when suspicious activity is detected.

Integrating the pause functionality into the protocol is crucial for immediate response, allowing developers to investigate and mitigate the exploit while preventing further damage. This proactive approach not only helps in maintaining the integrity of the protocol but also preserves user trust and confidence.