Price Manipulation

How are users protected from price manipulation attacks?

Attack 1: Retirement Before Sale

Context

• Attacker has carbon that can be sold to the protocol.
• Attacker is able to retire almost all of the carbon from this carbon class.

Steps

1. Attacker retires almost all of the carbon from a carbon class, inflating its price.
2. Attacker immediately sells carbon from this carbon class to the protocol at a premium, offsetting the retirement cost and making a large profit.

For an in-depth explanation of this attack, see Carbon Loophole.

How Users are Protected

The protocol works in phases. There is always a phase between a retirement and a consecutive sale where users are aware of the current supply and are able to modify their allocations for that class.

Users can defend themselves by dropping their kVCM allocations between the retirement and the consecutive sale: this which will correct the price before the attacker is able to extract value.

Attack 2: Price Drop Arbitrage

Context

• Carbon price suddently drops outside of the protocol.
• Attacker is able to immediately buy carbon at this price.
• Attacker is able to immediately sell it to the protocol.

Steps

1. Attacker monitors carbon prices outside of the protocol.
2. Attacker buys carbon immediately after a price drop.
3. Attacker immediately sells carbon from to the protocol at a premium, making a profit.

How Users are Protected

Two scenarios:

1. The price drop happens during the pricing phase and users know about it.

   Users can defend themselves by dropping their kVCM allocations before the attacker is able to sell carbon at a discounted price.

2. The price drop happens during the execution phase.

   1. Users who know about the price drop can use the Attacker’s strategy.

   2. If some users don’t know about the price drop:

      It is expected that somebody with an information edge gets arbitrage opportunities: this is how markets are supposed to work.

      The question is: how much value can be extracted?

      Not so much. The interactive simulation below shows that, in case of a 50% price drop:

      • When 100% of the kVCM and K2 are allocated to the carbon class, the Attacker can make “unlimited” profits.

      • When 50% of kVCM and K2 are allocated to the carbon class, the Attacker makes the highest profit by selling around 2.5 times the current carbon class supply: anything more is less profitable.

      • When 10% of kVCM and K2 are allocated to the carbon class, the Attacker makes the highest profit by selling around 1 time the current carbon class supply: anything more is less profitable.

Interactive Simulation