A critical vulnerability in Venus Protocol enabled the attack: the absence of proper safeguard mechanisms in pricing an ERC4626 token in the core pool allowed the attacker to execute the entire exploit, resulting in ~$800k in bas debt.
The operation began with the attacker securing a flash loan from Aave to establish a highly leveraged position in wUSDM—amounting to approximately $2.3M—through two coordinated smart contracts. The next move was donating around $450k USDM (ERC4626 inflation attack) to the wUSDM smart contract. This donation artificially inflated the conversion ratio from about 1.069 to 1.7, improving the health ratio of the collateral position and triggering a liquidation process. With this, the attacker could secure ~$200k in ETH in net profit (borrow and liquidation fees) after the flash loan was repaid.
Subsequently, the attacker proceeded to recover most of the “donation” by using the manipulated exchange rate to their favor—not through a further exploit, but by purchasing wUSDM liquidity on SyncSwap with USDC, then converting it using the inflated price established by the earlier donation. This final arbitrage step allowed the attacker to recover most of the initial donation, for about ~$400k.
All in, the attacker secured ~$600k in profits. The remaining ~$200k to get to the ~$800k in bad debt was liquidation revenue kept by Venus protocol. After exploiting Venus Protocol, the hacker could use the liquidity in Sync Swap’s pool (v3Pool stable concentrated liquidity), where most liquidity sat at an exchange rate of ~ 1.069 USDC for 1 wUSDM. This allowed the exploiter to bridge USDC from any chain to zkSync and swap 1.069 USDC for 1 wUSDM, which could then be unwrapped for 1.7 USDM. This USDM could subsequently be bridged to other USDM-supported chains with secondary market USDC/USDM pools, such as Curve, where the attacker could swap 1 USDM for 1 USDC and then bridge back the USDC, restarting the loop process.
Consequently, the attacker extracted approximately all of the ~$400k USDM that was “donated” in the previous transaction by the exploiter, which remained on the wUSDM smart contract until he withdrew all wUSDM liquidity provided in the SyncSwap Pool. It’s worth noting that LP providers were not affected as they received USDC using the correct exchange rate in exchange for the swap, at which point the hacker had no further opportunities.
## Conclusion
This exploit underscores the **critical risks** associated with **price oracle integration in ERC-4626 tokens**, particularly the vulnerabilities of **over-leveraging and collateral manipulation**. The absence of **protocol-level safeguards**, such as **price update delays, minimum deposit thresholds, and/or mechanisms to neutralize the effects of unexpected token transfers**, created conditions that allowed the attacker to exploit Venus Protocol.
**Mountain Protocol and USDM and wUSDM holders remain unaffected by this event.**