Textbook-level hunt! $THE price manipulation case review: Why did 30M collateral only result in 2M bad debt?

In the decentralized finance space, a repeatedly validated yet often ignored truth is: the collateral value on the books and the actual market realizable value are completely different.

Recently, the $THE token on the Venus protocol experienced a typical Mango Markets-style price manipulation attack. The attacker targeted the illiquid collateral $THE with a familiar tactic: first collateralize $THE to borrow other assets, then use the borrowed funds to buy more $THE, artificially driving up its price. After the time-weighted average oracle updates, the inflated price assigns a higher nominal value to the collateral, allowing the attacker to borrow more assets, creating a cycle.

Because $THE has very shallow on-chain trading depth, its price was pushed from around $0.27 up to nearly $5. The oracle then updated the price to about $0.5, providing the attacker with further leverage amplification.

A key limitation is that $THE has a supply cap, which prevents the attacker from infinitely expanding their collateral position. However, the attacker used a classic old trick to bypass this—targeting the Compound fork protocol’s “donation attack.” After depositing large amounts of $THE, they directly transferred $THE to the vTHE contract. Through this “donation,” they increased the total recognized collateral value within the contract, breaking through the supply cap.

After the first round of attack, the price of $THE stabilized around $0.5. At this point, the attacker could have exited with the borrowed assets. But they clearly aimed for higher profits, so they continued to inject the borrowed assets into the market to buy $THE, attempting a second round of price rally.

The problem then arose: despite the price being abnormally high, the market’s selling pressure had become extremely heavy. The attacker’s continued buying made it difficult to push the price higher. Eventually, they nearly exhausted their borrowing capacity, with their position health factor approaching the liquidation threshold of 1.

At this point, the situation was very clear: the collateral held by the attacker, including their initial assets and the $THE bought during the attack, had a nominal total value of about $30 million. But the core flaw of these collateral assets was that the market simply lacked enough liquidity to absorb such a large position.

Once the liquidation process was triggered, these massive amounts of $THE would be dumped into the market. And no one in the market would be willing to buy such a huge sell-off at these artificially inflated prices. Unsurprisingly, after liquidation, the price of $THE plummeted to around $0.24, even lower than before the attack, as existing holders also joined in the sell-off.

In the end, the Venus protocol was left with about $2 million in bad debt. The attacker’s actual profit is still hard to fully quantify; but based on the activity traces of some of their addresses, they probably made almost nothing, or even faced losses due to operational mistakes. Of course, it’s also possible they profited through off-chain perpetual contracts positions.

This incident sharply highlights a fundamental fact: in DeFi, when the collateral itself lacks liquidity, the $30 million shown on the system ledger may be worth almost nothing in the actual market.

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