Chapter 1: What is the main topic discussed in this episode?
Security is not an issue in TradFi more than it is an issue in most other services because of the long settlement, right?
Chapter 2: What was the DeFi exploit that changed crypto forever?
You can go back, as we said, do a couple of meetings, pay a couple of millions or tens of millions, but you can fix the damage. In crypto, a hack is a physics event. It's closer to an aerospace, right? Because if you have an issue in an airplane, people die. In crypto, okay, if you have an issue, people don't die. But it's still very severe, right?
Chapter 3: How did the exploit occur and who was behind it?
And you have this irreversible damage. And now we see like systemic even.
Bankless Nation, welcome to the podcast. We're here with Dan Litzer from Nascent and also Odysseus from Phylex Systems. Guys, it's great to have you on, although the circumstances are not fantastic. We're talking about a hack today. How are you guys doing, though? Doing well. Thanks for having us.
Thank you for having us, guys. Let me give us a sit rep just so we can kind of just move forward through some of the details and then we'll kind of dive in a little bit deeper on some of the important details here. So April 18th, we had a hack in DeFi. Likely North Korea's Lazarus Group, it's kind of who everyone is assuming is behind this attack, exploited KelpDAO's Layer Zero powered bridge.
to create 116,000 RS ETH tokens, that is the restaked ETH token out of KelpDAO, without any backing. So extra tokens minted, they then deposited those tokens into Aave V3 across Arbitrum and Ethereum Mainnet to borrow $236 million in wheat.
Chapter 4: What are the implications of bridge risk and protocol composability?
So unbacked RS ETH tokens deposited into Aave allowed them to withdraw real ETH from the Aave system, leaving Aave with about $280 million in bad debt that it cannot recover. As a result, some panic withdrawals have followed $5 billion in ETH outflows with Justin Sun pulling out $150 million just alone.
In response to this attack, Aave paused the RS ETH markets and the WEATH reserves across multiple chains just to kind of constrain the damage. Now it's got $180 million in bad debt. The TVL and Aave plunged from $26 billion to $17 billion kind of as like panic withdrawals happened.
Chapter 5: What are the consequences of the L2 architecture following the hack?
Interestingly, turn of events, the Arbitrum Security Council recovered $70 million in ETH in a pretty unprecedented violation of chain state, basically seizing the stolen assets by Dow Governance Vote, kind of opening up Pandora's box about what immutability means on layer twos. There are a ton of conversations that kind of sprawl out from this.
And maybe just to add some context, this hack doesn't actually even break into the top 10 in terms of dollar value lost. But it seems that this hack is a top three, if not a number one hack in terms of Just the significance of some of the implications of the future of the DeFi industry and the security of on-chain assets.
Dan, I want you to check me in that statement and talk to me about why this event specifically, why this nature of this hack is so significant for the state of DeFi.
There's a number of reasons.
Chapter 6: How does the Arbitrum intervention challenge the concept of immutability?
I think one is that we're seeing such major protocols. Kelp actually had a lot of value in it, but Layer 0 is widely used across the ecosystem. And Aave is frequently held up as one of the most trusted names in DeFi, obviously the largest in terms of TVL. And so to see them affected in this way by an exploit really shakes people. And I think it also is really significant because
This is due to the composability that we've all been so excited about with DeFi. And here we're seeing the downsides of composability when you have not just ETH, but you've got like staked ETH in a liquid staking form, deposit into Eigenlayer. So it's restaked there. You've got a liquid restaking wrapper. You're bridging that to other chains. You're using that as collateral.
You've got these levered loops going. There's just so many things happening here. And there's a lot of things that had to go wrong for us to be in this state. A lot of people have been playing the blame game, saying like, you know, who's responsible here? And I think the answer is if,
Chapter 7: What lessons can be learned from the exploit regarding security?
Any of these parties had been more buttoned up. Everybody from from Kelp to Layer Zero to Ave to Ave borrowers, potentially even the EF. Like there's there's so many different places that you can point fingers. But if anybody had really, really done their job, the damage would have been less than it was.
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Chapter 8: Will DeFi survive in the face of these security challenges?
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Yeah, there's also just a nature of just like the level of sophistication because it required the threading of a needle across like three needles, right? You needed to have exploited layer zero and then that had to align with the risk management in Aave and also with KelpDAO's utilization of layer zero.
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