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DeFi and Credit Risk

On the synthetic assets decentralized finance (DeFi) platform Mirror Protocol, a mismatch in the reported price of underlying assets has resulted in an ongoing exploit that has the ability to drain all of its cash.

Mirroruser, a governance participant on the protocol's forum, discovered the attack on Sunday. As of this writing, the synthetic asset pools Mirror BTC (mBTC), Mirror Polkadot (mDOT), Mirror Ether (mETH), and Mirror Galaxy (mGLXY) on the protocol have lost nearly all of their assets worth over $2 million.

On the Terra and Terra Classic layer-1 blockchains, as well as BNB Chain and Ethereum, trading of synthetic assets such as stocks and cryptocurrency is possible.

The exploit was made feasible via a price issue in Luna Classic (LUNC). Even if their real market prices varied wildly according to CoinGecko, the remaining validators on Terra Classic indicated that the price of LUNC at $0.000122 was the same as the freshly minted Terra (LUNA) ($9.32).

The "Terra Classic validators were using an outdated version of the oracle software," according to Chainlink community advocate ChainLinkGod.

In May, both Venus Protocol and Blizz Finance were victims of a similar attack when price oracle Chainlink's stated LUNA price remained at $0.10 while the market price dropped dramatically. Blizz Finance was completely depleted, while Venus suffered a $11.2 million loss.

The Mirror vulnerability will infect the other "m" asset pools by roughly 8:00 a.m. UTC on Tuesday, according to Terra community whistleblower FatMan on Twitter. The account further states that if the developers act to solve the flaw, most of the pools can be preserved.

The pricing problem for LUNC looked to have been corrected at 12:55 a.m. UTC, since the price being verified by the oracle had restored to its genuine market value.

This is the second time Mirror has been exposed to a serious flaw. According to FatMan in a Friday tweet, the prior weakness in Mirror's code was exploited "hundreds of times" since 2021. The initial exploit allowed a user to gain access to other users' protocol collateral and extract it for themselves. He stated that the first exploiter made off with "far over $30 million" and was not discovered until May 2022.

The Terra ecosystem was reintroduced on Saturday when Terra 2.0 went live, as planned by founder Do Kwon. Terra 2.0 is a fork of the Terra Classic blockchain, which is currently known as Terra 2.0. Investors who owned the prior version of LUNA and the TerraUSD (UST) stablecoin during the Terra ecosystem's catastrophic collapse earlier this month will get LUNA tokens as an airdrop.

Mirror Protocol (MIR) tokens are currently trading at $0.31, down 2% in the last 24 hours, according to CoinGecko.

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