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>OP is obviously talking about CEX Certainly -- I agree OP (arcticbull) was replying to a comment about DeFI by explaining the dangers of a centralized exchang

by SilasX 5y ago

>OP is obviously talking about CEX Certainly -- I agree OP (arcticbull) was replying to a comment about DeFI by explaining the dangers of a centralized exchange! That makes it a confused, unhelpful response, not one that "obviously" meant something coherent if you squint hard enough and practice sufficiently strained exegesis. >As for DEXs being manipulated, absolutely not sure why you believe that’s the case? This has nothing to do with DEXs and everything to do with margin (which are coming to DEXs). Margin has "come to" DEX the moment smartcontracts offer collateralized DeFi lending, which they have, so I'm not sure what you mean here. >DEXs and AMMs make it much more expensive to provide liquidity in terms of capital efficiency versus CEXs, and thus more vulnerable to manipulation. The reason (I'm claiming) centralized exchanges are more vulnerable is that a) they own the platform and are the word of god on it -- whence the stories of people getting margin called at flash-crash prices that don't exist on other platforms. If they say prices are trading at some level, you just have to deal with it. That's not possible when you have to trade how the algorithm says. b) If someone "stupidly" buys in one direction on a DEX, "for manipulation", they've vulnerable to the entire universe of arbitrageurs who can exploit the resultant price differences. Inter-[centralized] exchange arbitrage is much harder. I brought up the point simply to emphasize that, to the extent that there's manipulation, it does not look like the manipulation you'd see on CEX, which was how OP was basing his argument. Furthermore, even the issue of more expensive liquidity from transaction fees wouldn't be true for the far-cheaper L2 sidechains. (Btw, you might want to use the terms in their unabbreviated forms at least once just to make it easy on people who aren't up to speed.)

qeternity 5y ago
> Margin has "come to" DEX the moment smartcontracts offer collateralized DeFi lending, which they have, so I'm not sure what you mean here. Ok, fair. What I mean is high leverage, which is the fuel for the type of manipulation I’m referring to. To your point about CEX lying about price, that’s a very risky proposition for the arbitrage reasons you mention (CEX arbitrage actually easier for a number of reasons, but I understand why you’d think DEX is easier). If I run a CEX, unless I collude with every other venue I risk all the arbitrageurs buying/selling my fake prices which means it’s not fake, I’ve just traded against them. > Furthermore, even the issue of more expensive liquidity from transaction fees wouldn't be true for the far-cheaper L2 sidechains. No, I said capital efficiency, not execution cost. DEX costs are crazy, but that’s by choice, whereas the capital efficiency is a structural issue. If I want to provide liquidity on 100 CEX markets, I only need enough capital to wear the orders I actually get filled on at any given point in time. As an AMM I’d have have enough capital to be in a 100 different LPs. To illustrate: let’s say I want to provide $1m of resting liquidity in 100 CEX markets. Let’s say that in doing this, I end up having positions at any point in time that require $10m of capital. If I want to provide the same $1m of liquidity in 100 DEX markets, I need $100m. So a CEX ends up being 10x more efficient from a capital use perspective.
- SilasX 5y ago
  >Ok, fair. What I mean is high leverage, which is the fuel for the type of manipulation I’m referring to. Why does that make a difference? And how is it any more coherent to talk about margin "coming to" DEX? The moment anyone can borrow on margin, it has "come to" DEX. You keep speaking with a mental model of DEX that doesn't jibe with reality, like they're walled gardens rather than platforms open to anyone with little friction other than gas fees. >To your point about CEX lying about price, that’s a very risky proposition for the arbitrage reasons you mention (CEX arbitrage actually easier for a number of reasons, but I understand why you’d think DEX is easier). It's fun to idly speculate about this, but we know for a fact that flash crashes have happened on centralized exchanges, which is stronger evidence than any of your assertions of superior understanding of how they work. Furthermore, people have had their margin liquidated on those CEXes at the fake prices. >No, I said capital efficiency, not execution cost. DEX costs are crazy, but that’s by choice, whereas the capital efficiency is a structural issue. If I want to provide liquidity on 100 CEX markets, I only need enough capital to wear the orders I actually get filled on at any given point in time. As an AMM I’d have have enough capital to be in a 100 different LPs. If that's what you meant, then it's coming from the same dubious mental model I complained about above -- when you enter into a liquidity pool, you are providing liquidity to the entire cryptocurrency's network, not just people who are "on" that DEX (which isn't a coherent concept). Anyone and everyone has the option to accept that offer (sorry, "remove that liquidity"). Several protocols look at the entire DEX market to find the best (combination of) price(s). You do not need to be in multiple liquidity pools (which, again, not a coherent concept). LPs are not something you have to "be in"; you as a trader are free to accept the offers (sorry, "remove the liquidity") of any LP in existence.
  - qeternity 5y ago
    > If that's what you meant, then it's coming from the same dubious mental model I complained about above It’s not, because I’m saying something different than you think I am. > when you enter into a liquidity pool, you are providing liquidity to the entire cryptocurrency's network, not just people who are "on" that DEX (which isn't a coherent concept). Um, what?!? I’m really not sure you understand how this works. What do you think it means to be an LP? > Several protocols look at the entire DEX market to find the best (combination of) price(s). You do not need to be in multiple liquidity pools (which, again, not a coherent concept). No, just no. You keep saying it’s not coherent but I don’t think you understand how it works. You might be in an optimizer that moves your capital around, but a given unit of capital can only be providing liquidity for one LP at a time. > LPs are not something you have to "be in"; Uh, if you’re not in it, then you’re not providing liquidity. This whole conversation is premised on providing $X liquidity to Y market. In a DEX that requires $X, whereas in a CEX, it requires a maximum of $X and in practice a fraction of $X.
arcticbull 5y ago
Btw, re: DEXs I was thinking specifically of flash loan manips that exploited a number of platforms a few months ago. These involved briefly breaking the peg of stable coins on DEXs via short-term loans. [1] I think it's brilliant. > One of the most notorious flash loan attacks to have ever hit the space is the exploit on DeFi protocol bZx, where the attackers borrowed funds from the platform and quickly swapped them with stablecoins (sUSD). Since the stablecoin is governed by a smart contract, the attacker had manipulated its price by placing a large buy order on sUSD, which pushed the price of the stablecoin to $2, doubling its pegged value. Then, the attacker took a larger loan from the higher-priced sUSD, repaid his loans, and took the profit with him. It's relevant here because stable coin prices can be manipulated at DEXs too, or at least have been in the past. I'm not sure there's a long enough track record to guarantee it won't happen again before things go pear shaped if you're trying to take your short structured this way via DEX. There's smart contract bug risk, counter-party risk in the stable coin collateral and peg risk. Also regulatory risk. [1] https://www.cybavo.com/glossary/flash-loan-attack/ https://www.cybavo.com/glossary/flash-loan-attack/
- SilasX 5y ago
  The relevant question is whether the peg can be broken long enough for the loan to get margin called (by someone else exploiting the smartcontract to liquidate collateral). Lasting for the length of a flash loan isn’t enough.
  - arcticbull 5y ago
    I suppose that's true, but are you confident that's not possible? I'm not but as you can probably tell I'm pretty skeptical :)
    - yokem55 5y ago
      Flash loans have to be paid back in the same block or everything the flash loan funded reverts. And to ensure this happens, it usually is all wrapped up on the same transaction bundle. But liquidations are only triggered on oracle updates. And those happen at fixed intervals (measured in time or price movement), and can only happen a block at a time, in blocks after the flash loan has been closed.

by SilasX 5y ago

qeternity 5y ago

> Margin has "come to" DEX the moment smartcontracts offer collateralized DeFi lending, which they have, so I'm not sure what you mean here. Ok, fair. What I mean is high leverage, which is the fuel for the type of manipulation I’m referring to. To your point about CEX lying about price, that’s a very risky proposition for the arbitrage reasons you mention (CEX arbitrage actually easier for a number of reasons, but I understand why you’d think DEX is easier). If I run a CEX, unless I collude with every other venue I risk all the arbitrageurs buying/selling my fake prices which means it’s not fake, I’ve just traded against them. > Furthermore, even the issue of more expensive liquidity from transaction fees wouldn't be true for the far-cheaper L2 sidechains. No, I said capital efficiency, not execution cost. DEX costs are crazy, but that’s by choice, whereas the capital efficiency is a structural issue. If I want to provide liquidity on 100 CEX markets, I only need enough capital to wear the orders I actually get filled on at any given point in time. As an AMM I’d have have enough capital to be in a 100 different LPs. To illustrate: let’s say I want to provide $1m of resting liquidity in 100 CEX markets. Let’s say that in doing this, I end up having positions at any point in time that require $10m of capital. If I want to provide the same $1m of liquidity in 100 DEX markets, I need $100m. So a CEX ends up being 10x more efficient from a capital use perspective.

SilasX 5y ago
>Ok, fair. What I mean is high leverage, which is the fuel for the type of manipulation I’m referring to. Why does that make a difference? And how is it any more coherent to talk about margin "coming to" DEX? The moment anyone can borrow on margin, it has "come to" DEX. You keep speaking with a mental model of DEX that doesn't jibe with reality, like they're walled gardens rather than platforms open to anyone with little friction other than gas fees. >To your point about CEX lying about price, that’s a very risky proposition for the arbitrage reasons you mention (CEX arbitrage actually easier for a number of reasons, but I understand why you’d think DEX is easier). It's fun to idly speculate about this, but we know for a fact that flash crashes have happened on centralized exchanges, which is stronger evidence than any of your assertions of superior understanding of how they work. Furthermore, people have had their margin liquidated on those CEXes at the fake prices. >No, I said capital efficiency, not execution cost. DEX costs are crazy, but that’s by choice, whereas the capital efficiency is a structural issue. If I want to provide liquidity on 100 CEX markets, I only need enough capital to wear the orders I actually get filled on at any given point in time. As an AMM I’d have have enough capital to be in a 100 different LPs. If that's what you meant, then it's coming from the same dubious mental model I complained about above -- when you enter into a liquidity pool, you are providing liquidity to the entire cryptocurrency's network, not just people who are "on" that DEX (which isn't a coherent concept). Anyone and everyone has the option to accept that offer (sorry, "remove that liquidity"). Several protocols look at the entire DEX market to find the best (combination of) price(s). You do not need to be in multiple liquidity pools (which, again, not a coherent concept). LPs are not something you have to "be in"; you as a trader are free to accept the offers (sorry, "remove the liquidity") of any LP in existence.
- qeternity 5y ago
  > If that's what you meant, then it's coming from the same dubious mental model I complained about above It’s not, because I’m saying something different than you think I am. > when you enter into a liquidity pool, you are providing liquidity to the entire cryptocurrency's network, not just people who are "on" that DEX (which isn't a coherent concept). Um, what?!? I’m really not sure you understand how this works. What do you think it means to be an LP? > Several protocols look at the entire DEX market to find the best (combination of) price(s). You do not need to be in multiple liquidity pools (which, again, not a coherent concept). No, just no. You keep saying it’s not coherent but I don’t think you understand how it works. You might be in an optimizer that moves your capital around, but a given unit of capital can only be providing liquidity for one LP at a time. > LPs are not something you have to "be in"; Uh, if you’re not in it, then you’re not providing liquidity. This whole conversation is premised on providing $X liquidity to Y market. In a DEX that requires $X, whereas in a CEX, it requires a maximum of $X and in practice a fraction of $X.

arcticbull 5y ago

Btw, re: DEXs I was thinking specifically of flash loan manips that exploited a number of platforms a few months ago. These involved briefly breaking the peg of stable coins on DEXs via short-term loans. [1] I think it's brilliant. > One of the most notorious flash loan attacks to have ever hit the space is the exploit on DeFi protocol bZx, where the attackers borrowed funds from the platform and quickly swapped them with stablecoins (sUSD). Since the stablecoin is governed by a smart contract, the attacker had manipulated its price by placing a large buy order on sUSD, which pushed the price of the stablecoin to $2, doubling its pegged value. Then, the attacker took a larger loan from the higher-priced sUSD, repaid his loans, and took the profit with him. It's relevant here because stable coin prices can be manipulated at DEXs too, or at least have been in the past. I'm not sure there's a long enough track record to guarantee it won't happen again before things go pear shaped if you're trying to take your short structured this way via DEX. There's smart contract bug risk, counter-party risk in the stable coin collateral and peg risk. Also regulatory risk. [1] https://www.cybavo.com/glossary/flash-loan-attack/ https://www.cybavo.com/glossary/flash-loan-attack/

SilasX 5y ago
The relevant question is whether the peg can be broken long enough for the loan to get margin called (by someone else exploiting the smartcontract to liquidate collateral). Lasting for the length of a flash loan isn’t enough.
- arcticbull 5y ago
  I suppose that's true, but are you confident that's not possible? I'm not but as you can probably tell I'm pretty skeptical :)
  - yokem55 5y ago
    Flash loans have to be paid back in the same block or everything the flash loan funded reverts. And to ensure this happens, it usually is all wrapped up on the same transaction bundle. But liquidations are only triggered on oracle updates. And those happen at fixed intervals (measured in time or price movement), and can only happen a block at a time, in blocks after the flash loan has been closed.