Forms of Attack Against the Avalanche Network All networked systems are vulnerable to various kinds of attacks. As with any computer network, the Avalanche Network contains certain vulnerabilities. The Avalanche Network relies on a network of validator nodes that agree on the order and validity of transactions. These nodes form the backbone of the consensus process. If the malicious actor cannot control the Validator nodes directly, they might attempt to compromise the Validators that already control a substantial portion of staked AVAX. This could involve hacking, bribery, deception or coercion. A malicious actor could also conduct an “eclipse attack.” In an eclipse attack, a malicious actor could isolate parts of the network so that the malicious actor’s nodes can influence the consensus in isolated sections of the network, eventually leading to a split. In an example of another type of attack from September 2022, an attacker executed a flash loan attack on an Avalanche-based lending protocol to steal approximately $370,000 worth of stablecoins from a smart contract. A flash loan exploit generally involves borrowing uncollateralized funds within a single transaction and using those funds to manipulate prices or otherwise exploit vulnerabilities in other applications; if successful, the attacker repays the loan within the same block and retains any illicit profit. Further, in October 2023, a smart contract operating on the Avalanche Network experienced a flash loan exploit resulting in a loss of more than $2 million. This is not intended as an exhaustive list of all forms of attack against the Avalanche Network. For additional information, see “Risk Factors.” Market Participants Validators and Block Producers Validators range from Avalanche enthusiasts to professional operations that design and build dedicated machines and data centers, including “clusters,” which are groups of validators that act cohesively and combine their processing to confirm transactions. Staking rewards on the Avalanche network are determined by stake amount, staking period length, uptime, and correct participation in network validation. When a validator confirms a transaction, the validator and any associated stakers’ participation is factored into their eligible staking rewards. During the course of ordering transactions and validating blocks, validators may be able to prioritize certain transactions in return for increased rewards or other benefits, an incentive system known as “Maximal Extractable Value” or MEV. For example, in blockchain networks that facilitate DeFi protocols in particular, such as the Ethereum Network, users may attempt to gain an advantage over other users by offering greater transaction fees. Validators less commonly capture MEV in the Avalanche Network because, unlike the Ethereum Network, it does not publicly expose transactions before they are accepted by a validator. However, some efforts are underway to help AVAX validators consistently capture MEV. See “—Summary of an AVAX Transaction” above. Investment and Speculative Sector This sector includes the investment and trading activities of both private and professional investors and speculators. Historically, larger financial services institutions are publicly reported to have limited involvement in investment and trading in digital assets, although the participation landscape is beginning to change. Currently, there is relatively limited use of digital assets in the retail and commercial marketplace in comparison to relatively extensive use by speculators, and a significant portion of demand for digital assets is generated by speculators and investors seeking to profit from the short- or long-term holding of digital assets. Retail Sector The retail sector includes users transacting in direct peer-to-peer AVAX transactions through the direct sending of AVAX over the Avalanche Network. The retail sector also includes transactions in which consumers purchase goods and services from commercial or service businesses through direct transactions or third-party service providers, although the use of AVAX as a means of payment is still developing and has not yet been accepted in the
99
Made with FlippingBook - professional solution for displaying marketing and sales documents online