Attacks on Dynamic DeFi Interest Rate Curves
Abstract
As decentralized money market protocols continue to grow in value locked, there have been a number of optimizations proposed for improving capital efficiency. One set of proposals from Euler Finance and Mars Protocol is to have an interest rate curve that is a proportional-integral-derivative (PID) controller. In this paper, we demonstrate attacks on proportional and proportional-integral controlled interest rate curves. The attack allows one to manipulate the interest rate curve to take a higher proportion of the earned yield than their pro-rata share of the lending pool. We conclude with an argument that PID interest rate curves can actually \emph{reduce} capital efficiency (due to attack mitigations) unless supply and demand elasticity to rate changes are sufficiently high.
Cite
@article{arxiv.2307.13139,
title = {Attacks on Dynamic DeFi Interest Rate Curves},
author = {Tarun Chitra and Peteris Erins and Kshitij Kulkarni},
journal= {arXiv preprint arXiv:2307.13139},
year = {2023}
}