This report provides a chronology of events that caused a BLP: USDC drawdown to 1:0.93 between Feb 22nd to Feb 25th, led by a potential SOL price manipulation. It also demonstrates the steps taken to re-establish the BLP: USDC exchange rate to 1:1 as well as our future plans for long-term risk management.
Timeline of Events
First Cycle
Starting on 22nd Feb and throughout 23rd Feb, trader X on Buffer Finance began generating large profits while trading only on the SOL/USD pair, using 3 wallets:
During this cycle, The trader generated significant profit executing strategies with a win rate of 95%-100%, which caused the BLP: USDC exchange rate to fall from 1:1 to 1:0.97.
Second Cycle
24th Feb was devoid of any unusual trading activity on Buffer.
On 25th Feb, the trader returned to Buffer, repeatedly entering 50 SOL positions over a short span of time, using the same strategies using 3 new wallets:
This led to a second drawdown in the BLP: USDC exchange rate causing it to fall to 1:0.93.
In total the trader made 64 trades generating 280,116 USDC in payout across 6 trading wallets on the SOL/USD pair between 23rd Feb to 25th Feb.
Response
The team began monitoring trader X’s activity on Buffer on 22nd Feb, right after the trader first initiated a series of large trades with high win rates.
Why did we not halt trading on SOL/USD pair initially?
Although the win rate and the focus on the SOL/USD pair were highly unusual, lucky streaks do happen in trading. Hence the team continued to closely monitor the situation while also working on a plan to re-establish the BLP: USDC exchange rate.
On 25th Feb, trader X’s activity strongly indicated a potential SOL price manipulation across several exchanges to influence the outcome of trades on Buffer. In light of this, we disabled the SOL/USD pair to avoid further depletion of the BLP pool. While we continued to observe the other low altcoin pairs for any suspicious trading activity. Also, changing the minimum timeframe to 1 hour and reducing max utilization to 0.75% on the LINK/USD pair.
BLP Recovery
All of the trades on SOL between 22nd Feb to 25th Feb caused the BLP pool to lose a total of 145,000 USDC. The same trades generated a total of 20,000 USDC in fees.
On 25th Feb, we deposited a total of 125,000 USDC from the Buffer treasury and 20,000 USDC, which are the fees generated by trader X into the BLP pool. Thus re-establishing the BLP: USDC exchange rate back to 1:1.
During the incident, withdrawals were not halted at any point, which precipitated the decentralized nature of Buffer Finance.
For LPs who withdrew while the manipulation was ongoing or users who were impacted by the incident, please create a support ticket on discord for quick resolution!
Early Takeaways and long term risk management
This incident is not a defining moment in our story, though it is a valuable lesson on more robust risk management and faster implementations. It’s been a month since Buffer’s mainnet deployment, and early such incidents only help us in building a stronger Buffer!
While tightening the overall risk management is a perpetually ongoing endeavor for us, the incident has also prompted a re-evaluation of altcoin risk exposure, especially on low-volume altcoin pairs. As a result, future asset pair listings will go through more vigorous listing criteria. Additionally, we have set up more developer nodes to improve the responsiveness and availability of the dev team in case of emergency situations. More circuit breakers that allow us to reduce the latency between incidents and immediate risk mitigation.’
To the Community,
We recognize this is a particularly complex and increasingly challenging design space as Buffer grows larger and attracts more savvy traders. It’s a lesson we welcome as it allows us to develop more robust models over time as protocol sophistication increases — because what doesn’t kills us only makes us stronger🦾!
But our true strength comes from YOU, as you continue to stand by Buffer!
Thank you for your support 🐙♥️