Group Uses Flash Loan to Game Maker Protocol Governance

Want something fast in decentralized finance but don’t want to wait for that whole decentralized governance thing? Just use a flash loan!

That’s what BProtocol, founded behind the former CTO of Kyber, did, using a single transaction to push through its own proposal on the Maker protocol.

Flash loans allow DeFi users to take out large loans for a fraction of a percent, provided they can pay back the full amount during a single Ethereum block. They’re typically used to take advantage of arbitrage opportunities, so that a trader can simultaneously buy a token at a low price and sell it elsewhere for a higher one.

Using it for governance is something new.

Here’s how it worked:

BProtocol used 50,000 ETH to borrow wrapped ETH from decentralized exchange dYdX. It put the wrapped ETH on Aave protocol to borrow $7 million in MKR governance tokens, which allow holders to vote on proposals affecting Maker’s operations. It locked those tokens to vote for its proposal, then unlocked them to return the funds to AAVE and dYdX.  

According to Maker, MKR locked in a voting contract “is only accessible with the wallet used to set up the voting contract.” (Maker hasn’t yet returned a Decrypt request for comment on the mechanics of the voting contract.)

Though Maker said BProtocol had been forthright in explaining its actions, in a forum post today, a Maker governance facilitator wrote, “[BProtocol’s] actions are a practical example for the community that flash loans can and may impact system governance and highlight that MKR market liquidity needs to be actively monitored.”

It noted that over 63,000 in MKR is currently available for flash loans on DeFi platforms Aave, Balancer, and Uniswap—so this could happen again.

As a result, Maker admins are making a few changes. First, they’re asking MKR holders not to put their governance tokens on these platforms, lest they be used in similar governance attacks. Second, it’s delaying plans to include Yearn Finance and Balancer as collateral for loans, moves that had been scheduled for this week. 

Furthermore, its mandating that 100,000 MKR be necessary to unlock certain capabilities of the network—well above the outstanding liquidity available.

Which isn’t to say someone won’t figure out how to game the system again, as intricate as it is. Innovation, after all, is what this space is all about.