defi-protocols

name	defi-protocols
description	Skill: defi-protocols. See SKILL.md body for details. Use when this domain is relevant.
domain	trading
author	oyi77
license	Apache-2.0
subdomain	trading
tags	["algorithms","defi","markets","protocols","trading"]
version	1.0.0

Overview

DeFi protocol patterns for Automated Market Makers (AMMs), lending pools, flash loans, yield farming, order-book DEXs, cross-chain bridges, and oracle integrations. Covers the mathematical foundations, Solidity implementations, Hardhat fork-testing patterns, and Web3.py/Ethers.js interaction code for each primitive. Security invariants (reentrancy, price manipulation, MEV) are treated as first-class design constraints, not afterthoughts.

Each section provides the economic invariant, the Solidity implementation pattern, a concrete test or interaction script, and the attack surface specific to that primitive.

When to Use

Trigger phrases:

• "build DEX or AMM"
• "create lending protocol"
• "yield aggregation strategies"
• "flash loan arbitrage"
• "oracle integration"
• "cross-chain bridge"
• "liquidity pool math"
• "DeFi security audit"

Matching signal: The task involves implementing, auditing, extending, or interacting with any of the core DeFi primitives below. The skill covers both the math and the production Solidity with tests.

When NOT to Use

• Task is about portfolio management, not protocol implementation (use portfolio-manager)
• Task is about low-level smart contract development unrelated to DeFi (use smart-contract-dev)
• Task is about NFT marketplace implementation (use nft-marketplace)
• Task is about wallet key management or gas estimation (use crypto-wallet)
• Task requires financial advice or trading strategy (use trading-strategist)
• You need on-chain forensic investigation (use onchain-transaction-forensics)

AMM Core: Constant Product (x * y = k)

Formula

The Uniswap V2 invariant: reserve0 * reserve1 = k. A trade that adds dx of token0 and receives dy of token1 must satisfy:

(reserve0 + dx * 0.997) * (reserve1 - dy) = reserve0 * reserve1

The 0.3% fee is extracted before the trade reaches the curve. The output formula:

dy = (dx * 997 * reserve1) / (reserve0 * 1000 + dx * 997)

Solidity

// Uniswap V2-style pair swap
function swap(uint256 amountIn, address tokenIn, address tokenOut, uint256 minOut) external {
    (uint256 rIn, uint256 rOut) = getReserves(tokenIn, tokenOut);

    // amountOut = amountIn * 997 * rOut / (rIn * 1000 + amountIn * 997)
    uint256 amountOut = (amountIn * 997 * rOut) / (rIn * 1000 + amountIn * 997);

    require(amountOut >= minOut, "slippage");
    require(amountOut < rOut, "insufficient liquidity");

    // transfer in
    IERC20(tokenIn).safeTransferFrom(msg.sender, address(this), amountIn);
    // transfer out
    IERC20(tokenOut).safeTransfer(msg.sender, amountOut);

    // update reserves
    _update(afterBalance(token0), afterBalance(token1));
}

function getReserves(address t0, address t1) internal view returns (uint256, uint256) {
    return t0 < t1
        ? (reserve0, reserve1)
        : (reserve1, reserve0);
}

Price Calculation

Spot price from reserves: P = reserve1 / reserve0 (price of token0 in terms of token1). Executing a trade shifts the price proportionally to trade size. After selling dx, the new spot price:

P_new = reserve1 / (reserve0 + dx * 0.997) = reserve1 / (newReserve0)

JavaScript (ethers.js) - Query Pool Price

async function getPoolPrice(pairAddress, provider) {
    const pair = new ethers.Contract(pairAddress, PAIR_ABI, provider);
    const [r0, r1] = await pair.getReserves();
    const token0 = await pair.token0();
    const price = token0.toLowerCase() < someToken.toLowerCase()
        ? Number(r1) / Number(r0)
        : Number(r0) / Number(r1);
    return price;
}

Python (web3.py) - Simulate Swap

from web3 import Web3

def simulate_swap(amount_in_wei: int, reserve_in: int, reserve_out: int) -> int:
    """Calculate output for a Uniswap V2 swap (0.3% fee)."""
    amount_in_with_fee = amount_in_wei * 997
    numerator = amount_in_with_fee * reserve_out
    denominator = reserve_in * 1000 + amount_in_with_fee
    return numerator // denominator

# Example: swap 1000 USDC (6 decimals) into ETH
usdc_in = 1000 * 10**6
r_usdc = 5_000_000 * 10**6   # 5M USDC in pool
r_eth  = 2_500 * 10**18       # 2500 ETH in pool

eth_out = simulate_swap(usdc_in, r_usdc, r_eth)
print(f"Output: {eth_out / 10**18:.6f} ETH")

AMM Variants

Weighted Pools (Balancer)

Balancer generalizes constant product to n tokens with weights w_i:

prod(reserve_i ^ w_i) = k

For a two-token pool with weights 80/20:

r0 ^ 0.8 * r1 ^ 0.2 = k

Spot price with weights: P = (r0 * w1) / (r1 * w0)

Trading one token for another changes the price differently than a 50/50 pool. Weighted pools allow LPs to concentrate risk exposure while still earning fees.

Stable Swap (Curve)

Curve combines constant product and constant sum for correlated assets (USDC/USDT):

x * y * (x^2 + y^2) = k (simplified two-peg)

More generally: A * n^n * sum(x_i) + D = A * D * n^n + D^(n+1) / (n^n * prod(x_i))

Where A is the amplification coefficient — higher A means flatter curve near peg, less slippage for stable pairs. The D invariant converges to total liquidity when all tokens are at peg, and to constant product when far from peg.

Concentrated Liquidity (Uniswap V3)

LPs provide liquidity within discrete price ranges [p_a, p_b]. L = sqrt(k). The virtual reserves adjust so liquidity only depletes when price exits the range.

// V3 tick math
function sqrtPriceX96ToPrice(uint160 sqrtPriceX96, uint256 decimals0, uint256 decimals1)
    internal pure returns (uint256)
{
    // sqrt(P) is stored as Q64.96: sqrtPriceX96 = sqrt(P) * 2^96
    uint256 sqrtPrice = uint256(sqrtPriceX96);
    uint256 priceX192 = sqrtPrice * sqrtPrice;
    return priceX192 * 10**decimals0 / (2**192 * 10**decimals1);
}

Position value within a range:

amount0 = L * (1 / sqrt(p_low) - 1 / sqrt(p_high)) amount1 = L * (sqrt(p_high) - sqrt(p_low))

Impermanent loss is concentrated: if price exits the range, the position becomes fully denomimated in the cheaper token.

Impermanent Loss

IL occurs when LP return diverges from HODL return. For a price change factor r = P_new / P_old in a constant-product pool:

IL(r) = (2 * sqrt(r)) / (1 + r) - 1

Price Change	IL
1.25x (25% up)	-0.6%
1.5x (50% up)	-2.0%
2x (100% up)	-5.7%
3x (200% up)	-13.4%
4x (300% up)	-20.0%

def impermanent_loss(price_ratio: float) -> float:
    """IL as fraction of HODL value. r = new_price / old_price."""
    return (2 * (price_ratio ** 0.5)) / (1 + price_ratio) - 1

IL is symmetric: a 50% drop (-50%) has the same IL as a 100% gain (+100%). Fee income offsets IL over time; the breakeven period depends on pool volume and fee tier.

Slippage Calculation

// Given pool reserves and trade size, compute price impact
function priceImpact(uint256 amountIn, uint256 reserveIn, uint256 reserveOut)
    internal pure returns (uint256 bp)
{
    // returns basis points of price impact
    uint256 kPrev = reserveIn * reserveOut;
    uint256 newReserveIn = reserveIn + amountIn;
    uint256 newReserveOut = (kPrev * 1000) / (newReserveIn * 997); // approximate
    uint256 realizedPrice = (amountIn * 1e18) / (reserveOut - newReserveOut);
    uint256 spotPrice = (reserveIn * 1e18) / reserveOut;
    bp = (realizedPrice * 10000) / spotPrice - 10000;
}

TWAP Oracles from AMM Reserves

Uniswap V2 TWAP

Accumulate price * elapsed at the first transaction of each block:

// In _update()
(uint112 r0, uint112 r1, ) = getReserves();
blockTimestampLast = blockTimestamp;
price0CumulativeLast += r1 * elapsed / r0;  // price of token0 in token1
price1CumulativeLast += r0 * elapsed / r1;

// Consumer computes TWAP over a window
function consult(address token, uint256 amountIn, uint256 window)
    external view returns (uint256 amountOut)
{
    uint256 elapsed = blockTimestamp - observationTimestamp;
    uint256 priceCumulative = price0CumulativeLast - price0Cumulative;
    uint256 twap = priceCumulative / elapsed;
    amountOut = amountIn * twap / 1e18;  // assuming 18-decimal tokens
}

Uniswap V3 TWAP

V3 stores an array of observations (tick, timestamp) per pool. Each observation is a tickCumulative accumulator. Oracle subgraph queries fetch two observations and compute average tick:

// ethers.js — get V3 TWAP
async function getV3Twap(pool: string, windowSeconds: number, provider: Provider) {
    const contract = new ethers.Contract(pool, V3_POOL_ABI, provider);
    const obs = await contract.observations(await contract.slot0());
    // simplified: observe() returns (tickCumulatives, secondsPerLiquidity)
    const [tickCumulatives] = await contract.observe([0, windowSeconds]);
    const avgTick = Number(tickCumulatives[0] - tickCumulatives[1]) / windowSeconds;
    return 1.0001 ** avgTick;
}

Never use spot price from a single pool as an oracle. Always use TWAP over >= 30 minutes.

Lending Protocols

Overcollateralized Lending (Aave-style)

Borrowers deposit collateral (e.g., ETH), then borrow up to a loan-to-value (LTV) ratio. The core state:

// Simplified lending pool
contract LendingPool {
    mapping(address => mapping(address => uint256)) public deposits;  // user => asset => amount
    mapping(address => mapping(address => uint256)) public borrows;   // user => asset => amount
    mapping(address => uint256) public totalLiquidity;                // asset => total supplied
    mapping(address => uint256) public totalBorrows;                  // asset => total borrowed

    uint256 constant LTV = 7500;         // 75% in basis points
    uint256 constant LIQUIDATION_THRESHOLD = 8250;  // 82.5%
    uint256 constant LIQUIDATION_BONUS = 500;       // 5%

    function deposit(address asset, uint256 amount) external {
        IERC20(asset).safeTransferFrom(msg.sender, address(this), amount);
        deposits[msg.sender][asset] += amount;
        totalLiquidity[asset] += amount;
    }

    function borrow(address asset, uint256 amount, address collateral) external {
        uint256 collateralValue = getOraclePrice(collateral) * deposits[msg.sender][collateral];
        uint256 borrowValue = getOraclePrice(asset) * (borrows[msg.sender][asset] + amount);
        require(borrowValue * 10000 <= collateralValue * LTV, "over LTV");

        borrows[msg.sender][asset] += amount;
        totalBorrows[asset] += amount;
        IERC20(asset).safeTransfer(msg.sender, amount);
    }
}

Health Factor

healthFactor = (collateralValue * liquidationThreshold) / (borrowValue * 10000)

When healthFactor < 1.0, the position is liquidatable.

function getHealthFactor(address user) public view returns (uint256) {
    (uint256 totalCollateralETH, uint256 totalDebtETH) = getUserAccountData(user);
    if (totalDebtETH == 0) return type(uint256).max;
    return (totalCollateralETH * LIQUIDATION_THRESHOLD) / (totalDebtETH * 10000);
}

function liquidationCall(
    address collateral, address debt, address user, uint256 debtToCover, bool receiveAToken
) external {
    uint256 healthFactor = getHealthFactor(user);
    require(healthFactor < 1e18, "healthy");

    // Liquidator repays debt, receives collateral at a discount
    uint256 collateralAmount = debtToCover * getOraclePrice(debt) * (10000 + LIQUIDATION_BONUS)
        / (getOraclePrice(collateral) * 10000);

    IERC20(debt).safeTransferFrom(msg.sender, address(this), debtToCover);
    IERC20(collateral).safeTransfer(msg.sender, collateralAmount);

    // update state
    deposits[user][collateral] -= collateralAmount;
    borrows[user][debt] -= debtToCover;
}

Interest Rate Models

Linear model: borrowRate = baseRate + slope * utilization

Jump rate (Aave V2): Below the optimal utilization U_opt, the slope is moderate. Above U_opt, the slope spikes to incentivize new deposits and penalize further borrowing.

// Jump rate model
function calculateBorrowRate(uint256 utilization) public pure returns (uint256) {
    uint256 U_OPTIMAL = 8000;   // 80%
    uint256 BASE_RATE = 0;       // 0%
    uint256 SLOPE1 = 400;        // 4% APR
    uint256 SLOPE2 = 30000 * 1e9;  // 300% APR at U_max

    if (utilization <= U_OPTIMAL) {
        return BASE_RATE + (SLOPE1 * utilization) / U_OPTIMAL;
    } else {
        uint256 excess = utilization - U_OPTIMAL;
        return BASE_RATE + SLOPE1
            + (SLOPE2 * excess) / (1e4 - U_OPTIMAL);
    }
}

function utilizationRate(uint256 totalBorrows, uint256 totalLiquidity)
    internal pure returns (uint256)
{
    if (totalLiquidity == 0) return 0;
    return totalBorrows * 10_000 / totalLiquidity;
}

Flash Loans

Flash loans allow uncollateralized borrowing within a single transaction. The borrowed amount must be returned (plus fee) before the transaction ends, or it reverts.

Aave V3 Flash Loan

// Receiver contract
contract FlashLoanReceiver is IFlashLoanSimpleReceiver {
    address constant POOL = 0x87870Bca3F3fD6335C3F4ce8392D69350B4fA4E2;  // Aave V3 on Mainnet
    uint256 public constant FLASHLOAN_FEE = 5;  // 0.05% in basis points

    function executeOperation(
        address asset, uint256 amount, uint256 premium,
        address initiator, bytes calldata /* params */
    ) external override returns (bool) {
        require(msg.sender == POOL, "unauthorized");
        require(initiator == address(this), "wrong initiator");

        // --- arbitrage logic here ---

        // Approve repayment with premium
        IERC20(asset).approve(POOL, amount + premium);
        return true;
    }

    function initiateFlashLoan(
        address tokenBorrow, uint256 amount, bytes calldata params
    ) external {
        IPool(POOL).flashLoanSimple(
            address(this), tokenBorrow, amount, params, 0
        );
    }
}

Uniswap V3 Flash Swap

Uniswap V3 allows any swap to borrow tokens as long as the callbacks deposit the equivalent amount. No separate flash loan contract needed.

// Uniswap V3 flash swap — borrow token1, repay with token0
function uniswapV3SwapCallback(
    int256 amount0Delta, int256 amount1Delta, bytes calldata /* data */
) external override {
    // amount0Delta > 0 means we owe token0; amount1Delta > 0 means we received token1
    require(amount0Delta > 0, "only token0 flash");

    // use borrowed token1 here...

    // repay token0
    IERC20(token0).safeTransfer(pool, uint256(amount0Delta));
}

function initiateFlashSwap(address pool, uint256 amountIn, uint256 amountOutMin) external {
    // amountSpecified < 0 means exactOutput (borrow output)
    ISwapRouter.ExactInputSingleParams memory params = ISwapRouter.ExactInputSingleParams({
        tokenIn: token0,
        tokenOut: token1,
        fee: 3000,
        recipient: address(this),
        deadline: block.timestamp,
        amountIn: amountIn,
        amountOutMinimum: amountOutMin,
        sqrtPriceLimitX96: 0
    });
    ISwapRouter(ROUTER).exactInputSingle(params);
}

dYdX Style (deprecated pattern, legacy reference)

// dYdX SoloMargin flash loan (simplified)
function callFunction(
    address sender, Account.Info memory account,
    bytes memory data
) external {
    // borrowed funds available here

    // repay happens implicitly — SoloMargin checks balance difference
}

Yield Farming

LP Token Staking

A staking contract accepts LP tokens and distributes rewards proportionally.

contract StakingRewards {
    IERC20 public stakingToken;
    IERC20 public rewardsToken;

    uint256 public rewardRate;          // reward tokens per second
    uint256 public lastUpdateTime;
    uint256 public rewardPerTokenStored;
    uint256 public totalSupply;

    mapping(address => uint256) public balanceOf;
    mapping(address => uint256) public userRewardPerTokenPaid;
    mapping(address => uint256) public rewards;

    modifier updateReward(address account) {
        rewardPerTokenStored = rewardPerToken();
        lastUpdateTime = block.timestamp;
        if (account != address(0)) {
            rewards[account] = earned(account);
            userRewardPerTokenPaid[account] = rewardPerTokenStored;
        }
        _;
    }

    function rewardPerToken() public view returns (uint256) {
        if (totalSupply == 0) return rewardPerTokenStored;
        return rewardPerTokenStored
            + (block.timestamp - lastUpdateTime) * rewardRate * 1e18 / totalSupply;
    }

    function earned(address account) public view returns (uint256) {
        return balanceOf[account] * (rewardPerTokenStored - userRewardPerTokenPaid[account]) / 1e18
            + rewards[account];
    }

    function stake(uint256 amount) external updateReward(msg.sender) {
        totalSupply += amount;
        balanceOf[msg.sender] += amount;
        stakingToken.safeTransferFrom(msg.sender, address(this), amount);
    }

    function withdraw(uint256 amount) external updateReward(msg.sender) {
        totalSupply -= amount;
        balanceOf[msg.sender] -= amount;
        stakingToken.safeTransfer(msg.sender, amount);
    }

    function getReward() external updateReward(msg.sender) {
        uint256 reward = rewards[msg.sender];
        if (reward > 0) {
            rewards[msg.sender] = 0;
            rewardsToken.safeTransfer(msg.sender, reward);
        }
    }
}

Vesting Schedules

Distribute rewards linearly over a duration:

contract Vesting {
    struct Schedule {
        uint256 totalAmount;
        uint256 startTime;
        uint256 duration;
        uint256 claimed;
    }

    mapping(address => Schedule) public schedules;

    function claimable(address user) public view returns (uint256) {
        Schedule storage s = schedules[user];
        if (block.timestamp < s.startTime) return 0;
        uint256 elapsed = block.timestamp - s.startTime;
        uint256 vested = s.totalAmount * Math.min(elapsed, s.duration) / s.duration;
        return vested - s.claimed;
    }

    function claim() external {
        uint256 amount = claimable(msg.sender);
        require(amount > 0, "nothing to claim");
        schedules[msg.sender].claimed += amount;
        token.safeTransfer(msg.sender, amount);
    }
}

Order Book DEX

0x Protocol (Off-Chain Order Relay)

Orders are signed off-chain and submitted on-chain by a taker. The protocol matches orders via a settlement contract.

// 0x limit order (simplified)
struct Order {
    address makerToken;
    address takerToken;
    uint256 makerAmount;
    uint256 takerAmount;
    address maker;
    uint256 expiry;
    uint256 salt;
}

function fillOrder(Order calldata order, bytes calldata signature) external {
    require(block.timestamp <= order.expiry, "expired");
    require(
        ECDSA.recover(keccak256(abi.encode(order)), signature) == order.maker,
        "bad sig"
    );

    IERC20(order.takerToken).safeTransferFrom(msg.sender, order.maker, order.takerAmount);
    IERC20(order.makerToken).safeTransferFrom(order.maker, msg.sender, order.makerAmount);
}

RFQ-Based Matching (Request-for-Quote)

Used by 0x API, Matcha, 1inch — market makers quote prices via off-chain API, then the taker submits the quote on-chain. The quote includes a signature that binds the maker to the price.

Cross-Chain Bridges

Lock/Mint Pattern

// Chain A — lock tokens, emit event for relayer
contract BridgeLock {
    mapping(address => uint256) public totalLocked;

    event Locked(address indexed token, address indexed sender, uint256 amount, bytes32 indexed destChain);

    function lock(address token, uint256 amount, bytes32 destChain, bytes calldata recipient) external {
        IERC20(token).safeTransferFrom(msg.sender, address(this), amount);
        totalLocked[token] += amount;
        emit Locked(token, msg.sender, amount, destChain);
    }

    function unlock(address token, uint256 amount, bytes calldata proof) external {
        require(verifyBurnProof(token, amount, proof), "invalid proof");
        IERC20(token).safeTransfer(msg.sender, amount);
        totalLocked[token] -= amount;
    }
}

// Chain B — mint tokens when locked on Chain A
contract BridgeMint {
    mapping(address => address) public wrappedTokens;  // original token => wrapped

    event Minted(address indexed wrapped, address indexed recipient, uint256 amount);

    function mint(bytes calldata proof) external {
        (address originalToken, address recipient, uint256 amount) = parseLockProof(proof);
        address wrapped = wrappedTokens[originalToken];
        require(wrapped != address(0), "unsupported token");

        _mint(wrapped, recipient, amount);
        emit Minted(wrapped, recipient, amount);
    }

    // burn/redeem
    function burn(address wrapped, uint256 amount, bytes32 destChain, bytes calldata recipient) external {
        _burn(wrapped, msg.sender, amount);
        emit Burned(wrapped, msg.sender, amount, destChain, recipient);
    }
}

Liquidity Network Bridges

Two pools hold the same asset on both chains. Users deposit on chain A and receive from the pool on chain B. The operator rebalances periodically. No wrapped tokens needed, but liquidity is fragmented.

Light Client Verification

Advanced bridges (LayerZero, IBC) validate headers from chain A on chain B using light clients. The Solidity contract stores block headers and verifies state proofs:

// Simplified header relay
contract LightClientBridge {
    struct BlockHeader {
        uint256 number;
        bytes32 stateRoot;
        bytes32 txRoot;
        uint256 timestamp;
    }

    mapping(uint256 => BlockHeader) public headers;

    function submitHeader(BlockHeader calldata header, bytes calldata attestation) external {
        require(verifyAttestation(header, attestation), "invalid attestation");
        headers[header.number] = header;
    }

    function verifyProof(bytes32 leaf, bytes32[] calldata proof, uint256 blockNumber)
        external view returns (bool)
    {
        bytes32 computedRoot = computeMerkleRoot(leaf, proof);
        return computedRoot == headers[blockNumber].stateRoot;
    }
}

Oracle Integration

Chainlink Price Feeds

contract PriceConsumer {
    AggregatorV3Interface internal priceFeed;

    constructor(address feed) {
        priceFeed = AggregatorV3Interface(feed);
    }

    function getLatestPrice() public view returns (int256) {
        (, int256 price, , uint256 updatedAt, ) = priceFeed.latestRoundData();
        require(block.timestamp - updatedAt <= 1 hours, "stale price");
        require(price > 0, "invalid price");
        return price;
    }
}

// ETH/USD feed on Mainnet: 0x5f4eC3Df9cbd43714FE2740f5E3616155c5b8419
// BTC/USD feed on Mainnet: 0xF4030086522a5bEEa4988F8cA5B36dbC97BeE88c

// ethers.js — read Chainlink price
async function getChainlinkPrice(feedAddress, provider) {
    const aggregator = new ethers.Contract(feedAddress, [
        "function latestRoundData() view returns (uint80,int256,uint256,uint256,uint80)",
        "function decimals() view returns (uint8)"
    ], provider);
    const [, price, , updatedAt] = await aggregator.latestRoundData();
    const decimals = await aggregator.decimals();
    return { price: Number(price) / 10 ** decimals, updatedAt: Number(updatedAt) };
}

Uniswap V2 TWAP Oracle

Already covered above — accumulate price * elapsed at each update, compute over a window. Deploy as a separate oracle contract that reads a pair's cumulative price.

MakerDAO Oracles

Maker's Medianizer aggregates prices from multiple feeds, publishes the median, and includes a delay before use. The DSValue and DSMedianizer contracts are legacy.

Oracle Security Patterns

// Multi-source validation
function validatePrice(uint256 priceCL, uint256 twap) internal pure returns (uint256) {
    uint256 deviation = priceCL > twap
        ? (priceCL - twap) * 10000 / twap
        : (twap - priceCL) * 10000 / priceCL;
    require(deviation < 500, "oracle divergence");  // max 5% divergence
    // return weighted average or min
    return priceCL < twap ? priceCL : twap;
}

Security

Reentrancy

The Checks-Effects-Interactions pattern plus OpenZeppelin's ReentrancyGuard:

import "@openzeppelin/contracts/security/ReentrancyGuard.sol";

contract SecureLending is ReentrancyGuard {
    function withdraw(uint256 amount) external nonReentrant {
        require(balances[msg.sender] >= amount, "insufficient");
        balances[msg.sender] -= amount;             // effect
        IERC20(token).safeTransfer(msg.sender, amount);  // interaction
    }
}

Price Manipulation (Oracle Attacks)

The example of failure: Aave V2 EURS depeg incident — attacker manipulated a low-liquidity Uniswap pair to get a false spot price, then liquidated positions in Aave.

// VULNERABLE — spot price from a single AMM
function getPriceLiquid(address pair) external view returns (uint256) {
    (uint256 r0, uint256 r1,) = IUniswapV2Pair(pair).getReserves();
    return r1 * 1e18 / r0;  // manipulatable with a single swap
}

// SAFER — TWAP from multiple sources
function getPriceSafe(address pair) external view returns (uint256) {
    uint256 twap = IUniswapV2TWAP(pair).consult(someToken, 1e18, 30 minutes);
    uint256 chainlink = aggregator.latestAnswer();
    // Take the lower of two (or the average, or revert on divergence > 5%)
    return (twap + chainlink) / 2;
}

Sandwich Attacks

MEV bots front-run and back-run user swaps:

1. Attacker sees user's pending swap transaction
2. Attacker buys before (front-run) — pushes price up
3. User buys at worse price
4. Attacker sells after (back-run) — profits from inflated price

Mitigation:

• Use a private mempool (Flashbots, MEV-Share)
• Set tight slippage bounds (minAmountOut)
• Use batch auctions (CowSwap) instead of direct DEX swaps
• Price-limit orders (e.g., maker orders settled at a target price)

MEV Protection Patterns

// Slippage sandwich protection — require exact output
function swapExactTokensForTokens(
    uint256 amountIn, uint256 amountOutMin,
    address[] calldata path, address to
) external returns (uint256[] memory amounts) {
    amounts = UniswapV2Library.getAmountsOut(factory, amountIn, path);
    require(amounts[amounts.length - 1] >= amountOutMin, "slippage");
    // ...transfer and swap
}

// Deadline protection — prevents long-pending transactions
function swapExactTokensForTokens(
    // ...
    uint256 deadline
) external {
    require(block.timestamp <= deadline, "expired");
    // ...
}

Hardhat Fork Tests

import { ethers } from "hardhat";

describe("AMM Integration", function () {
    it("should execute a flash loan arbitrage on mainnet fork", async function () {
        // Fork mainnet at a specific block
        await network.provider.request({
            method: "hardhat_reset",
            params: [{
                forking: {
                    jsonRpcUrl: `https://eth-mainnet.g.alchemy.com/v2/${process.env.ALCHEMY_KEY}`,
                    blockNumber: 18000000,
                }
            }]
        });

        // Impersonate a whale
        const whale = "0x...";
        await network.provider.request({
            method: "hardhat_impersonateAccount",
            params: [whale],
        });
        const signer = await ethers.getSigner(whale);

        // Execute the arbitrage
        const arb = await (await ethers.getContractFactory("FlashArb")).deploy();
        const tx = await arb.connect(signer).execute(amount, { gasLimit: 5000000 });
        const receipt = await tx.wait();

        expect(receipt.status).to.equal(1);
        const profit = await arb.profit();
        expect(profit).to.be.gt(0);
    });
});

Common Patterns

• Slippage protection: Always compare amountOut >= minAmountOut or amountIn <= maxAmountIn
• Deadline checks: Reject stale transactions with require(block.timestamp <= deadline)
• Emergency pause: OpenZeppelin's Pausable — halt all state-changing functions during incidents
• Fee tiers: Uniswap V3 uses 0.01%, 0.05%, 0.30%, 1.00% for different volatility pairs
• Pull over push: Let users withdraw (pull) instead of contract sending (push), avoiding DoS vectors
• Initialization protection: Use OpenZeppelin's Initializable for upgradeable contracts
• Access control: OpenZeppelin's AccessControl for role-based admin functions
• Fee-on-transfer tokens: Check balance before and after transfer; never assume amountIn == received

// Fee-on-transfer safe pattern
function deposit(address token, uint256 amount) external {
    uint256 before = IERC20(token).balanceOf(address(this));
    IERC20(token).safeTransferFrom(msg.sender, address(this), amount);
    uint256 received = IERC20(token).balanceOf(address(this)) - before;
    shares[msg.sender] += received;  // use received, not amount
}

Red Flags

• Spot price oracle from a single pool — trivial to manipulate with a single swap.
• Single-sided liquidity — a pool with only one token provisioned is a honeypot.
• Uncapped withdrawal fees — can drain users on withdrawal; there should be a ceiling.
• Flash loan fee set to zero without economic reason — invites griefing attacks.
• No minimum borrow amount — attackers can create dust positions to grief liquidations.
• Slippage tolerance set too high — excessive price impact accepted, MEV sandwich bait.
• Missing safeTransfer — non-standard tokens (USDT) cause transfers to silently fail.
• Incorrect fee ordering — fee deducted after swap math instead of before (V2 style).
• No deadline parameter — transactions can be held and executed later at unfavorable prices.
• ERC20 approve race condition — Uniswap V2 pattern uses safeIncreaseAllowance instead.
• Inflation attack on ERC-4626 vaults — first depositor can manipulate share price. Mitigate with minimum initial mint or virtual shares.
• Reentrancy in token callback — ERC-777 callbacks re-enter the protocol during transfer.
• Missing invariant check — no k-value check after V2 swap (Uniswap enforces k * 1000 >= kLast for fee harvesting).

Verification

After completing DeFi protocol implementation, confirm:

• AMM swap formula matches x * y = k with correct fee deduction (0.3% taken before curve)
• Flash loan repaid in full (plus premium) within the same transaction
• Slippage protection enforced via minAmountOut or maxAmountIn
• Deadline parameter guards stale transactions
• Oracle integration uses TWAP or multiple sources, never single-pool spot price
• ReentrancyGuard applied to all state-changing external calls
• Liquidation health factor computed correctly with oracle prices
• safeTransfer and safeTransferFrom used for all token transfers
• Fee-on-transfer tokens handled with pre/post balance checks
• Hardhat fork test executes the full flow against real mainnet state
• Emergency pause mechanism can stop critical functions

Process

1. Identify the primitive — AMM, lending, flash loan, staking, bridge, or oracle. Each has different invariants and attack surfaces.
2. Write the invariant first — Express the core constraint as a formula (e.g., x*y = k, healthFactor >= 1.0). All other code enforces this invariant.
3. Implement the core logic — The swap, borrow, stake, or mint function. Keep reading external state only. Avoid loops over unbounded arrays.
4. Add fee math — Determine where fees are extracted (before curve for AMM, after interest accrual for lending). Apply fee basis points correctly.
5. Apply security patterns — ReentrancyGuard, Checks-Effects-Interactions, access control, pause control.
6. Wire oracles — Chainlink for LTV/liquidation, TWAP for internal pricing decisions. Add staleness checks and multi-source validation.
7. Test with Hardhat fork — Deploy against a mainnet fork, impersonate whales, validate the full economic flow.
8. Invariant test — Write fuzz tests (Foundry) that assert the core invariant holds after any sequence of operations.
9. Audit for known attacks — Reentrancy, sandwich, price manipulation, donation attacks on vaults, flash loan re-deposit.
10. Document failure modes — What happens when oracle goes stale, when utilization spikes, when a pool gets drained. Document the circuit breakers.

Anti-Rationalization Table

Rationalization	Reality
"TWAP adds complexity I don't need; spot price works fine for my use case"	Spot price from a single pool is manipulatable for ~$100k on most pairs. TWAP over 30 min costs nothing in gas (one extra read) and prevents oracle attacks.
"I can skip the deadline parameter to simplify the interface"	Without a deadline, a user's transaction can be held by a validator and executed hours later at manipulated prices.
"AMMs replace order books entirely"	AMMs excel at passive liquidity but have worse price discovery for large orders and suffer from MEV. Order books with RFQ matching are superior for institutional flows.
"Flash loans are free capital — no risk"	Flash loan callbacks can re-enter the lending protocol to drain it. The Aave V2 codebase requires receiver contracts to be non-reentrant relative to the pool.
"I can use the same interest rate model for all pools"	Stable assets (USDC/DAI) can tolerate higher utilization before spike. Volatile assets need jump-rate models with a lower U_opt (~60%) to keep liquidity available.
"Concentrated liquidity is always better than V2"	Concentrated positions need active rebalancing. Passive LPs in V3 often earn less than V2 LPs after gas costs for position management. IL is concentrated, not eliminated.
"Bridges just lock and mint — simple"	Bridge security depends on the validator/threshold set, not the lock/mint logic. Wormhole's $320M hack was a signature verification bug, not a lock/mint flaw. Light client bridges are more secure but significantly more expensive to verify on-chain.
"Chainlink feeds are always reliable"	Chainlink feeds can go stale during extreme volatility (LUNA collapse). Always add a staleness check (heartbeat) and a fallback TWAP source with divergence checks.
"I'll add emergency pause after the audit"	Without a pause mechanism deployed from the start, a live exploit forces the team to coordinate a migration before the protocol can be stopped. Code pause + proxy admin = minutes to stop an exploit.