$600K Worth of Stolen Funds Frozen on CEX Platforms – Cypher Protocol

On Aug 18, 2023

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Cypher Protocol has successfully identified and frozen stolen cryptocurrencies valued at approximately $600,000 within centralized exchanges following an exploitation incident in August.

The decentralized exchange disclosed that this feat was accomplished through a collaborative effort involving numerous independent investigators. Seeking external assistance became necessary due to the hacker’s refusal to return the funds or unveil their identity within the stipulated timeframe, despite the entity extending a white hat bounty offer.

Return of Funds Depends on the Cooperation of CEXs

On August 18th, Cypher Protocol’s official X.com page announced a significant development: the successful freezing of funds. The announcement specified that these funds encompassed various cryptocurrencies and were held within several centralized exchanges. The tweet emphasized that the swiftness of fund return would be contingent upon the cooperation level exhibited by each centralized exchange (CEX) or the progress in securing and enforcing seizure warrants issued by law enforcement.

update from cypher
~$600k has been frozen across CEXs, the return of these funds will be predicated on the cooperation of these CEXs and seizure warrants being issued by law enforcement
— cypher ©️ (@cypher_protocol) August 17, 2023

Among the assets frozen were USDT, SOL, wETH, and a range of other altcoins. Notably, Cypher Protocol had intentions of compensating users, even if on a limited scale, for these assets, should they not be fully retrieved.

In a proactive move, the exchange had initially extended a white hat bounty equivalent to 10% of the seized funds, amounting to approximately $120,000, to the implicated hackers. Regrettably, the hackers failed to meet the stipulated deadline for returning the funds. Consequently, the exchange’s Twitter handle announced an opportunity for individuals to retrieve these lost funds, with Cypher offering a reward for their assistance.

Cypher Has Already Launched a Socialized Losses Policy

In response to a recent protocol exploit, Cypher adopted a socializing losses mechanism, distributing the impact of the incident more evenly among users. Rather than a few shouldering the entire burden, this approach aimed to ensure a fairer distribution of adverse effects. A redemption package was devised utilizing the remaining protocol assets, which encompassed various tokens, including USDC, USDT, SOL, and others.

The redemption process was structured on a pro-rata basis, meaning users received a portion of available assets corresponding to their involvement. To partake in the redemption, Cypher users and LIP depositors connected their wallets, and the redemption package was allocated according to asset values at the protocol’s freeze. The redemption program underwent meticulous auditing and was open-sourced, upholding transparency and security.

This initiative showcased Cypher’s commitment to user protection and fairness during challenging times. By embracing a socialized losses mechanism, Cypher demonstrated its dedication to ensuring a balanced outcome for all participants affected by the exploit. It also made sure to thank several individuals whose participation was imperative in the freezing of funds, including ZachXBT, a popular name in the crypto realm.

About the Exploit

On August 7th, Cypher issued an alert to its social media community regarding a security incident that prompted the freezing of its smart contract. According to Solscan, a Solana blockchain explorer, data indicated that the wallet suspected of being associated with the exploit managed to abscond with approximately 38,530 Solana tokens, alongside $123,184 worth of USD Coin. This unauthorized activity resulted in the illicit acquisition of $1,035,203 in funds.

Cypher has has experienced an exploit/security incident. The smart contract has been frozen.
The team is currently working with individuals and investigating
To the hacker: We are writing to see whether you would be open to speaking with us about any potential next steps.
— cypher ©️ (@cypher_protocol) August 7, 2023

The decentralized finance (DeFi) exchange facilitates lending and borrowing operations through primary accounts supported by various cross-collateralized sub-accounts. Regrettably, vulnerabilities within the system hindered the accurate monitoring of isolated sub-accounts and failed to ensure adequate margin checks prior to borrowing. These weaknesses within the platform contributed to the exploit and subsequent unauthorized fund transfers.

While this exploit dealt a blow to the already bearish crypto landscape, 2023 has witnessed a surge in such incidents. Despite this trend, the allure of DeFi has continued to grow. It becomes intriguing to observe how cryptocurrency giants navigate and thrive in the face of such challenges. As they manage to retain user confidence and attract a steady stream of participants, the future prospects of these giants amidst ongoing exploits and the evolving crypto space remain captivating.