Collateral Factor Manipulation

Collateral Factor Manipulation is a specific type of governance attack where the attacker changes the collateral factor of a low-liquidity asset to an artificially high level. By doing this, the attacker can borrow significantly more against their own holdings of that asset, effectively draining the protocol's liquidity pool.

This is often achieved through flash loan-based governance takeovers where the attacker temporarily gains the power to update protocol risk parameters. Once the borrowing is complete, the attacker abandons the position, leaving the protocol with under-collateralized bad debt.

This highlights the critical importance of risk-parameter governance and the need for timelocks to prevent such abrupt changes to lending conditions.