The Operating Techniques Of Short Squeeze Attack On Blockchain Network

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INTRODUCTION

As with many other techniques relevant to financial markets, short squeeze attack is quintessential persecution of the stock market practices despite the traditional system of market economy being in effect through the use of blockchain and cryptocurrencies. Simply put, short squeeze occurs when the value of an asset increases fast to a level where traders who sold a borrowed asset anticipating the value to go down (short sellers) buy the asset to cover their positions and avoid being in a loss. Such kind of increase in the asset price adds more to the already existing burden on the short selling side.

Given that cryptocurrencies are very volatile and are less regulated than other conventional markets, it si safe to say that short squeeze attacks on them are not uncommon. It has been suggested that even traders in decentralized exchanges and centralized exchanges may be further able to effect such attacks more successfully using advanced devices such as smart contracts. Furthermore, the anonymity of the blockchain can provide shield making very easy to carry out such attacks without being accountable.

In this regard, an insight into short squeeze attacks is important for the users of blockchain, especially those participating in DeFi platforms. This not only shields the single investor but also helps in the future stability and health of the market by informing them of the manipulation of the markets.

EXPLOITING MARKET SENTIMENT

The first step for short squeeze attackers is market sentiment. A community or a group of traders, or just simple manipulators, find some asset on the market where there are many short positions (bets that an asset’s price will fall). Usually it’s some asset that in the past has been losing value for quite some time and people have formed quite bearish opinions about its future.

What these attackers do first is they buy a large amount of this asset so that they trigger its price to go high suddenly. Short sellers get scared because then their bets start going against them—they become less profitable—and if the price goes up high enough, these short sellers begin to feel a sense of urgency as to be able to buy back the borrowed tokens at lower prices before they lose too much value. Because blockchains have a semi-decentralized nature, attackers can easily obtain tokens without revealing their identities, and coordinated buying can be done for anonymous wallets—so pretty much nobody knows whom you’re coordinating with and thus what your strategy might be until you actually do it—postponing discovery to after it’s already all over.

Market sentiment exploitation is important to induce a self-sustained vicious cycle of panic and buying. The price increase forces short sellers to face margin calls triggered by the deterioration of their net wealth, and they cover their short positions buying back the asset at increasingly high prices, further fuelling the price surge and enhancing the attack impact.

LIQUIDATION OF SHORT SELLERS

Once the price of the asset begins to go up, liquidation is on the horizon for short sellers. Short sellers borrow an asset and sell it at current market prices, with hopes that they will be able to buy it back later on at a lower price; if the asset’s price increases instead of decreases, they risk “getting liquidated,” or being forced to purchase back an asset at a loss in order to close their short position.

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In decentralized markets, this process is automated via smart contracts; as an asset’s price crosses certain thresholds, a smart contract will automatically mandate that a trader covering his or her short position must buy back that asset. This feature is designed to prevent massive losses — but also what attackers used during last week’s short squeeze attack. When enough high-quantity liquidations occur in close succession, they produce an unfettered train of buy orders which end up raising the general price level even higher.

On blockchain networks, this can happen very quickly and the effect on the market is similarly amplified. After short-sellers have been liquidated, the market is more volatile and increased inflation gives an attacker further profit.

MANIPULATION THROUGH FLASH LOANS

Flash loans are employed by attackers within what is often referred to as a price manipulation. Thus the term short squeeze. In the area of decentralized lending in particular the DeFi sector, flash ira loans are characterized by the absence of collateral where users are absolute creditors of the loan in cryptocurrency as long as the repayment is done in the subsequent transaction. This feature may be used to create price spikes in a very short period.

In the process of the short squeeze, I can easily attack the market with flash loans to corner the market by buying a lot of their asset in one price chunk. This sent shocks down the spine of the short sellers compelling them to requisition the asset at more exorbitant costs as raised above. After feeding enough worm to the bulls Manipulation of prices has occurred.

The way the tubular constriction models to short squeezes exploits flash loan facilities defines a serious flaw in the exchanges and protocols of decentralization. Since flash loans are made such that they are paid back in the course of a transaction they leave less untargeted debt for the attackers market manipulators.

CONSEQUENCES ON THE STABILITY OF THE MARKET

The final initiative in a short squeeze attack is its impact on the risk of overall market system. Short squeezes easily provoke extreme fluctuations in the price existent in any asset that is being traded on any given platform. For instance, after a successful shorting of stocks, the price of the stocks tends to plummet as attackers rush to sell and take their profits. This causes normal investors to take huge losses.

However, in a decentralized construct of the network, such implications can be more disastrous. Without any intervention in the market, short squeeze attacks can last longer than they ought to resulting in worse price movements. Furthermore, small cryptocurrency projects become most susceptible since they have little volumes in the market and depth that can act as shock absorbers allowing the devaluation of the asset.

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CONCLUSION

Short squeeze attacks are a serious threat to the current state of the market scope of the blockchain technology relatively, in decentralized environments. Liquidations due to market sentiment takedowns, and flash-loan driven aggressive destabilization of markets are all strategies that attackers deploy to profit from nature from short sellers and ordinary investors alike. Such manipulation of white and black, control, and barrier mechanisms of blockchain systems has made its decentralization attractive and secure.