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10th January 2023 > > Market manipulation.


The Mango Markets protocol manipulation is not going to end well for the perpetrator.

Market Snap

Market Wrap

XRP (Ripple) is seeing net inflows from institutional money at the start of 2023. With the case brought against them by the SEC to be resolved (hopefully) soon, does someone know something we don’t?

Other movers of note include the governance coins for liquid ETH staking protocols (see CCC 6th December 2022) especially Lido Finance whose native token LDO is up over 50% in a week.

Curious Cryptos’ Commentary — Market manipulation in TradFi and crypto land

Way back in the mid-90s I sat close to an equity derivatives trader whose geographical speciality was a low-cap, low-volume, Scandinavian market with very few companies of any size or liquidity with one or two notable exceptions.

Having flexed the muscles lent to him by his position as a trader at what was at the time the preeminent derivatives investment bank, he learnt that manipulating the closing price of the index was relatively easy to do, especially on a Friday close.

To be clear, this is an illegal act, known as market manipulation, and will lead to hefty jail sentences, especially in the US, the world’s leader in the regulation of financial markets.

One week he decided to put his mendacious plan into action.

He spent the week over-bidding for index calls from institutional clients, and then went in hard late on the Friday afternoon buying up large quantities of individual stocks. The lack of liquidity – a risk often underestimated by those with little market experience – caused outsize moves in the price of stocks and hence the index.

By the close he was longer individual stocks than his risk limits, and long a bunch of calls expiring that day heavily in-the-money. His manipulation of the market led to a large positive PnL (profit and loss) for the day.

Rather pleased with his fraud, and without any twangs of regret – presumably because his morals and conscience went missing in action – he was rather surprised on Monday lunchtime to be told that not only did the risk department raise significant concerns about the amount of risk he was carrying, the compliance department had discussed his trading behaviour with senior management, and clients had been furiously complaining to the management of the relevant stock exchange.

Immediately suspended, he was fired soon after, became the subject of a criminal investigation, and spent several years in jail, which was an appropriate outcome.

Meanwhile the bank itself lost a large amount of money, unwinding the individual stock positions, and compensating clients for their losses.

A sad and misguided tale indeed.

And one that has been copied in the crypto markets.

Mango Markets – many DeFi (decentralised finance) platforms have a food theme to their naming convention for no rational reason – is a Solana-based DEX (decentralised exchange) that allows you to swap, lend, and borrow cryptos with the option of using leverage.

On October 11th 2022 the platform was drained of $110mm of assets, initially attributed to an old-school, plain vanilla hack.

This wasn’t true, but to understand what happened, we need to understand one of the rudimentary operations of DeFi.

Oracles are tools that deliver off-chain information into the blockchain for use by smart contracts. In theory smart contracts exist in a decentralised world with no human intervention. This is not always the case – shutter all the nuclear and fossil fuel-based power stations in the world and we have virtually no electricity and no internet – but it’s our working model.

Oracles need to be robust, and reliable, but they can only be as good as their source information.

If that source information is wrong – or is manipulated to be an inaccurate reflection of the real world – the smart contracts will not function correctly.

And this is what happened to Mango Markets.

A malicious actor – whose identity was unknown at the time, but we will come back to that – saw that the market price of MNGO (Mango – the governance coin of the Mango Markets platform) could be manipulated using enough backing assets and leverage.

After depositing just $5mm of USDC (USD Circle, a stablecoin pegged at a dollar) he established a long position of 400mm MNGO/USDC swaps starting at a price of around 4c. By the end of his buying spree the price had risen to a peak of 91c. This is as clear a case of market manipulation that one could envisage.

He then posted the MNGO he had bought as collateral against borrowing a variety of other assets. As the price of MNGO began to subside, those loans started to get called (that’s known as liquidation risk for honest actors who foolishly leverage their crypto assets) leaving the protocol with MNGO to sell to pay off the loan. As more MNGO gets sold, the price decreases further, leading to ever more liquidations.

This is a scenario that can play out in all financial markets when leverage gets out of hand, whether the price has been manipulated or not.

By the end of this process, the investors in the protocol were nursing losses of $110mm due to the difference in value between the assets borrowed and moved elsewhere, and the value of the collateral (i.e. MNGO) posted against those loans.

Using a forum that maintains anonymity, the team behind Mango Markets agreed with the market manipulator that if he returned $67mm of the assets he could keep the rest as “bug bounty”. Put to a governance vote, 96% of MNGO holders who voted, voted in favour of this proposal.

Not long after, Avraham Eisenberg outed himself as the man behind the attack, on Twitter of course:

“I was involved with a team that operated a highly profitable trading strategy last week.”

A surprising confession, the reasons for which he explains:

“I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.”

No, bro, they are not “legal open market actions”.

Arrested in December, Eisenberg was charged yesterday with fraud, market manipulation, and violating the Commodity Exchange Act.

There is no possible defence that the actions taken were legal, and he has admitted he undertook those actions.

A twenty-five year jail sentence is Eisenberg’s fate. Good riddance I say.

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