How Does a Time-Weighted Average Price (TWAP) Oracle Mitigate Flash Loan Attacks on a Derivatives Contract?
A flash loan attack can temporarily manipulate the spot price on a DEX. A TWAP oracle mitigates this by calculating the average price over a period of time, rather than using the instantaneous spot price.
This averaging smooths out short-term, artificial price spikes caused by manipulation, making it much harder for an attacker to use a flash loan to trigger an unfair liquidation or settlement.
Glossar
Flash Loan Attacks
Attacks ⎊ Flash Loan Attacks exploit the nature of uncollateralized, atomic loans to manipulate asset prices temporarily on a single blockchain transaction, allowing the attacker to profit from arbitrage or oracle manipulation before repaying the loan.
Spot Price
Valuation ⎊ The spot price in cryptocurrency, options, and derivatives represents the current market-clearing price for immediate delivery of the underlying asset, functioning as a fundamental benchmark for pricing more complex instruments.
Twap Oracle
Oracle ⎊ A Twap Oracle, within cryptocurrency derivatives and options trading, represents a specialized data feed providing time-weighted average price (TWAP) benchmarks.
Flash Loan Attack
Exploitation ⎊ A flash loan attack represents a market manipulation technique enabled by decentralized finance (DeFi) protocols, specifically leveraging the ability to borrow substantial capital without collateral requirements, contingent upon full repayment within a single transaction block.
Average Price
Calculation ⎊ The Average Price represents the volume-weighted mean execution price of an underlying asset or derivative contract over a specified interval, crucial for settlement procedures in many crypto derivatives markets.
Flash Loan
Mechanism ⎊ A flash loan is a unique, uncollateralized loan mechanism in decentralized finance that allows users to borrow assets for a very short duration, typically within a single blockchain transaction.