Price Impact Arbitrage

Price impact arbitrage occurs when an attacker exploits the difference between a protocol's internal price and the broader market price. By causing a temporary price divergence through high-volume trading, the attacker can force the protocol to execute trades at disadvantageous rates.

This is a common strategy for draining liquidity from protocols that do not account for market impact or slippage correctly. It is a direct result of how automated market makers calculate trade execution prices.

Mitigating this requires advanced pricing models that incorporate real-time market data and volume-based slippage. It is a persistent challenge in maintaining fair market prices in DeFi.