Why Zero-Collateral Borrowing Was a Gift to Attackers

Aave and dYdX pioneered the zero-collateral loan, enabling $100M+ attacks with $0 starting capital. This turned DeFi into a live-fire stress test where attackers could atomically execute complex, multi-protocol exploits.

• Capital as a Non-Factor: Attack scale decoupled from attacker wealth.
• Atomic Arbitrage: Complex multi-step arbitrage and liquidation attacks became trivial to fund.
• Systemic Contagion: A single vulnerability could be exploited across the entire DeFi stack in one transaction.

UniswapX, CowSwap, and Across abstract transaction execution to solvers. This creates a trusted third-party layer where MEV and failed fills become critical risks. Attackers can now target the intent fulfillment layer itself.

• Solver Centralization: A handful of solvers control execution for billions in volume.
• Opaque Routing: Users lose visibility into the exact path of their funds, creating blind spots.
• New MEV Vectors: Solver competition creates novel front-running and back-running opportunities.

LayerZero, Wormhole, and other messaging bridges rely on off-chain attestations. A compromised oracle or validator set can mint infinite synthetic assets on a destination chain, draining all liquidity before the fraud proof window closes.

• Trusted Assumptions: Security collapses to the honesty of a small validator set or multisig.
• Asymmetric Risk: A single-chain exploit can drain liquidity across dozens of chains.
• Slow Finality: Fraud proofs and challenge periods are often longer than attack execution time.

The fix isn't more complexity, but radical simplification. Isolate risk by moving execution to dedicated, verifiable environments like ZK co-processors or bounded sandboxes. This limits blast radius and makes attacks non-atomic.

• Deterministic Proofs: Every action must generate a verifiable proof of correctness.
• Bounded Leverage: Cap the economic power a single transaction can wield.
• Explicit Routing: Force transparency in cross-chain and intent-based flows.

Zero-collateral loans treat uncollateralized debt as a liability, but attackers treat it as a risk-free, high-reward call option. The protocol bears 100% of the downside while the attacker captures unlimited upside. This creates a perverse incentive structure that guarantees exploitation.

• Key Flaw: No skin-in-the-game for the borrower.
• Attack Vector: Borrow max, bet on volatile asset, profit or default with zero personal loss.

Replace binary collateral checks with a probabilistic model of trust. Systems like ARCx and Spectral map wallet history to a credit score, enabling graduated, risk-adjusted borrowing limits. This moves the paradigm from "can they post collateral?" to "what is their historical likelihood of repayment?"

• Key Benefit: Enables some undercollateralization for trustworthy actors.
• Key Benefit: Shifts attack cost from a one-time exploit to a long-term reputation burn.

When loans are secured only by the value of a borrowed asset, the oracle becomes the single point of failure. Attackers on Mango Markets and Cream Finance didn't need to hack the protocol—they just needed to temporarily manipulate the price feed to create artificial solvency, drain the pool, and vanish.

• Key Flaw: Reliance on a single, manipulable truth for solvency checks.
• Attack Vector: Flash loan-powered price pump to inflate collateral value.

Defend against flash manipulation by decoupling price updates from instantaneous liquidation. Use Time-Weighted Average Prices (TWAPs) from DEXs like Uniswap V3 or implement circuit breakers that halt borrowing/liquidation during extreme volatility. This forces attackers to sustain the price move, raising capital costs exponentially.

• Key Benefit: Makes short-term price spikes economically unfeasible to exploit.
• Key Benefit: Preserves functionality for legitimate users during normal markets.

Zero-collateral protocols often had no effective liquidation mechanism. When a position is underwater by definition, who buys the bad debt? The result is a race to zero where the first to exit gets paid, and the protocol treasury covers the rest. This turns a lending protocol into an unfunded, opaque insurance pool.

• Key Flaw: No secondary market for negative-value positions.
• Attack Vector: Mass default triggers death spiral, draining protocol reserves.

Contagion is fatal. Follow the lead of Aave V3 with isolated pools and risk modules. Confine novel, risky asset borrowing to siloed pools with dedicated capital. For unavoidable bad debt, implement transparent, pre-defined socialized loss mechanisms (like MakerDAO's surplus buffer) instead of ad-hoc treasury raids.

• Key Benefit: Contains failure, protecting core protocol TVL.
• Key Benefit: Creates predictable, governance-led recovery paths.