Peg Attack

Attackers exploit inefficiencies in the arbitrage mechanism designed to maintain the peg. They deliberately create a large price deviation, then profit by draining collateral or manipulating the system's minting and redemption processes. This is often the initial trigger for de-pegging.

• Example: In an algorithmic stablecoin, attackers might mint new tokens with overcollateralized assets, then sell them on the open market to drive the price down, before redeeming them at the intended 1:1 value.

The attack targets the collateral backing of the pegged asset. By driving the asset's price below its peg, it triggers mass liquidation events for positions that used it as collateral. This forced selling creates a negative feedback loop, further depressing the price and accelerating the de-peg.

• Key Mechanism: This is common in overcollateralized stablecoins (like DAI with volatile collateral) or synthetic asset protocols where the pegged token is used as loan collateral.

Attackers manipulate the price oracles that feed external market data to the protocol. By artificially reporting a false price—either through flash loan attacks on the oracle's source or by dominating a specific liquidity pool—they can trick the system into allowing improper minting, redemptions, or avoiding liquidations that should occur.

• Vulnerability: Protocols relying on a single oracle or a small set of easily manipulated data sources are most at risk.

This feature mimics a traditional bank run. Attackers, often preceded by fear, uncertainty, and doubt (FUD), trigger a mass redemption event. If the protocol's liquidity reserves or collateral cannot cover all redemptions at the 1:1 value, it creates an insolvency crisis, breaking the peg permanently.

• Real-World Example: The collapse of Terra's UST was precipitated by a coordinated withdrawal from its Anchor Protocol yield reserve, followed by massive redemptions that its algorithm could not sustain.

The attack vector is a vulnerability in the smart contract code or governance process. Attackers may exploit a bug to mint unlimited tokens, steal collateral, or pass a malicious governance proposal that changes critical parameters (like collateral ratios or oracle addresses), destabilizing the peg from within the system's own logic.

A successful peg attack creates a reflexive feedback loop between price and demand. As the price drops below the peg, confidence erodes, reducing demand and increasing sell pressure, which drives the price down further. This death spiral is self-reinforcing and extremely difficult to stop without a massive, credible external intervention or recapitalization.

A Peg Attack is a financial exploit where an actor intentionally manipulates market conditions to de-peg an asset from its target value. The attacker typically shorts the asset on secondary markets while simultaneously draining liquidity from its primary reserve or mint/burn mechanism, creating a self-reinforcing cycle of panic selling and broken arbitrage.

This common vector targets the liquidity pool backing the pegged asset. An attacker borrows or acquires a large amount of the asset, then dumps it into the primary DEX pool (e.g., a Curve 3pool for a stablecoin). This exhausts the pool's reserves of the collateral asset (e.g., USDC), breaking the peg and preventing arbitrageurs from efficiently restoring it.

• Example: The 2022 attack on the UST stablecoin involved massive withdrawals from the Anchor protocol, collapsing the LUNA-UST arbitrage mechanism.

Many pegged assets (like wrapped assets or synthetic tokens) rely on price oracles to maintain their value. An attacker manipulates the oracle's price feed—often via flash loan attacks on the DEX pools it sources from—to create a false price discrepancy. This allows them to mint excessive amounts of the pegged asset against inflated collateral or redeem it for more underlying value than it's worth.

If an attacker gains control of a protocol's governance (e.g., via a token vote exploit), they can alter the minting parameters for a pegged asset. This allows them to mint unlimited, unbacked tokens or change collateral ratios, directly breaking the peg's trust model. This is a systemic risk for decentralized stablecoins with on-chain governance.

• Stablecoin: The most common target of peg attacks (e.g., algorithmic, collateralized).
• Arbitrage: The market force that normally maintains a peg, which attackers deliberately disrupt.
• Slippage: Extreme slippage during an attack accelerates the de-peg.
• Flash Loan: A frequent tool used to finance the initial capital outlay for an attack.
• Death Spiral: The catastrophic feedback loop that can result from a successful peg attack.

Protocols implement several guards against peg attacks:

• Over-collateralization: Requiring more collateral value than minted asset value.
• Circuit Breakers: Pausing mint/redemptions during extreme volatility.
• Decentralized & Robust Oracles: Using multiple, time-weighted price feeds.
• Liquidity Incentives: Encouraging deep, diversified liquidity pools to absorb sell pressure.
• Gradual Parameter Changes: Time-locks and multi-sig controls on critical governance updates.

The practice of exploiting price differences of the same asset across different markets. It is the primary economic force intended to restore a peg, but can also be the vector for an attack.

• Healthy Arbitrage: Traders buy the undervalued asset and redeem it for $1 of value, restoring parity.
• Exploitative Arbitrage: In an attack, arbitrageurs exploit broken redemption mechanisms or oracle failures to profit from the depeg itself.

An attack where an adversary provides incorrect price data to a protocol's oracle, tricking its smart contracts into valuing assets incorrectly. This is a common precursor or component of a peg attack.

• Targets: Lending protocols that use the peg asset as collateral, or algorithmic stablecoins that rely on price feeds for rebasing.
• Effect: Can allow the minting of undervalued assets or the liquidation of healthy positions, breaking the peg's foundation.

A catastrophic feedback loop specific to algorithmic stablecoins without sufficient collateral. A loss of peg triggers algorithmic mechanisms that worsen the imbalance, leading to hyperinflation of the stablecoin's supply and total collapse.

• Mechanism: To restore the peg, the protocol incentivizes minting of the stablecoin by burning its volatile governance token, destroying the token's value and further eroding confidence.
• Example: The depeg of Terra's UST in May 2022, which led to the near-zero valuation of its LUNA token.

The ratio of the value of collateral assets backing a stablecoin to the value of the stablecoins in circulation. A declining ratio indicates increasing risk and vulnerability to a bank run or peg attack.

• Overcollateralization: Systems like MakerDAO's DAI require collateral worth more than the debt issued (e.g., 150%).
• Undercollateralization: A ratio below 100% means the stablecoin is not fully backed, making it highly susceptible to a loss of confidence and a peg attack.

A situation where there is insufficient market liquidity to execute trades at stable prices. For a pegged asset, a liquidity crisis often precedes or accompanies a peg attack, as sell orders cannot be filled without significant slippage.

• Cause: Can be triggered by a sudden mass redemption (bank run) or the withdrawal of liquidity providers from decentralized exchanges.
• Result: The asset's market price deviates from its intended peg because the arbitrage mechanism cannot function without deep liquidity.