The removal of price impact on decentralized exchanges (DEX) will bring many benefits to users, but this also leads to a potential risk: price manipulation.
What is price impact, and how does it affect?
Regular traders will buy a bunch of tokens at once, with the price of each token being higher than the previous one. The difference between the current and post-purchase prices is called price impact.
For example, a user over 1Inch wants to use 100 ETH to buy DIP tokens. If the above transaction continues, this person will use $ 164,308 worth of ETH to buy only $ 68,661 worth of DIP tokens. The price impact is now 58.21%. That person will lose up to 95,647 USD. The reason is that there are not enough DIP token sellers at the market price in the liquidity pool to fill this transaction.
Therefore, minimizing the price impact is necessary if you do not want to risk losing money.
The mechanism of the GMX platform?
The GMX exchange is known for having no price impact, which means that users can place a $52 million ETH on a long position without affecting the price of ETH in the pool. They can then place another $20 million Short with absolutely no price difference.
For that reason, an ETH whale who acknowledged the mechanics of GMX can simply place a Long order of 50 million USD ETH through GMX, then through some large CEX such as Binance and FTX, buy 40 million USD of ETH on these exchanges, so that person gets 2% increase in price with leverage.
It is estimated that the average ETH purchase price on their CEX exchange could be around $1570 for 40 million USD of ETH.
This whale closed a $50 million Long GMX order for a profit of $1 million. Next, continue to open a short order of 20 million USD ETH on GMX. 40 million USD of ETH on the CEX exchange was sold, then this person closed the Short order, receiving an additional 400 thousand USD in profit from GMX.
Revenue: Closed Long order got 1 million USD, Short order got 400K USD.
Earned: 1.4 million USD.
Cost:
The selling price may be slightly lower than the purchase price, assuming about 1560 USD.
Loss of 10 USD for every ETH, totaling about 250,000 USD.
The trading fee on CEX is about 80,000 USD
GMX fee is about 140,000 USD
Total estimated cost: 690,250 USD
Net profit
Revenue - cost = 709,750 USD
So this whale made a profit of 709,750 USD with just a few simple transactions in a short period of time.
Comments
This can be done very quickly and exists at very low risk. This ultimately affects users on the GMX exchange because if the trader wins and receives the benefits, the liquidity provider will lose and lost their money. The above incident also directly affects holders of the GLP token, the token that provides liquidity to the entire system.
It was similar recently to the AVAX/USD pair last September 18. Immediately after a similar incident happened, GMX quickly made a move to record the entire previous Long Short value of the trading pair for closer investigation. However, this also concerns many other trading pairs on the GMX exchange.
We were notified of price manipulation of AVAX/USD on reference exchanges by monitoring systems and community members.
— GMX 🫐 (@GMX_IO) September 18, 2022
While we review the occurrence, open-interest for AVAX has been capped at $2m long / $1m short.
GLP and GMX trading markets continue to operate normally.
Summary
For now, until things are clear, Holstation's current advice is to limit holding GLP's GLP tokens if you don't want your assets to be "vaporized".
Holdstation will continue to update this information soon.
