Attacks on Dynamic DeFi Interest Rate Curves

TL;DR

This paper demonstrates vulnerabilities in PID-controlled interest rate curves in DeFi protocols, showing how they can be manipulated to unfairly extract yields, and argues that such curves may reduce capital efficiency under certain conditions.

Contribution

It provides the first analysis of attacks on PID-controlled interest rate curves in DeFi, highlighting potential security and efficiency issues.

Findings

Attacks can manipulate interest rates to favor attackers.

PID curves may decrease capital efficiency due to attack mitigations.

High supply-demand elasticity can mitigate attack impacts.

Abstract

As decentralized money market protocols continue to grow in value locked, there have been a number of optimizations proposed for improving capital efficiency. One set of proposals from Euler Finance and Mars Protocol is to have an interest rate curve that is a proportional-integral-derivative (PID) controller. In this paper, we demonstrate attacks on proportional and proportional-integral controlled interest rate curves. The attack allows one to manipulate the interest rate curve to take a higher proportion of the earned yield than their pro-rata share of the lending pool. We conclude with an argument that PID interest rate curves can actually \emph{reduce} capital efficiency (due to attack mitigations) unless supply and demand elasticity to rate changes are sufficiently high.