20 Million Tokens Lost in Latest Crypto Hack as Market Maker Wintermute Takes Blame

20 Million Tokens Lost in Latest Crypto Hack as Market Maker Wintermute Takes Blame

The airdrop of first-time governance tokens from Ethereum scaling solution Optimism has gone awry in a big way, thanks to a third-party provider the collective tapped to provide liquidity.

In total, around 20 million Optimism governance tokens (OP), loaned to facilitate transactions, were lost, with cryptocurrency market maker Wintermute claiming responsibility for the forfeiture.

The loan was originally intended for Wintermute's wallets on Optimism, but Wintermute CEO Evgeny Gaevoy said in a statement Statement that “we have made a serious mistake”.

Here's what happened: The wallet address that Wintermute used to obtain the loan was inaccessible because it relied on Ethereum Layer 1 multi-signature technology, which had yet to be deployed to Optimism, which runs as Layer 2. A Layer-1 is the basic function of a given blockchain, while Layer-2s build on top of it, typically to provide new features or liquidity.

Meanwhile, a hacker took advantage of the technological flaw to transfer the 20 million OP tokens from Layer-1 to Layer-2, even as Wintermute struggled to recover the pending funds. However, the attacker had only liquidated about a million of the stolen tokens by the time of publication.

“L1 is confusing enough for most people to navigate, and L2 brings a number of new paradigms in key management and security, even for experienced crypto users and teams,” Gaevoy said.

“We’re not sure why they decided not to liquidate everything at once,” Gaevoy said. "There is hope that this is a white hat exploit, in which case the remaining funds may be recoverable. However, we currently believe this is not the case as we have received no communication from them and our on-chain message went unanswered."

The attacker still owns 19 million OP tokens. Wintermute said the company plans to buy back the tokens once the attacker sells, saying the purchase “may result in price volatility in the token” but that the market maker “will make every effort to smooth out the effect.”

The Optimism Foundation has not chosen to upgrade its network - which will likely require a hard fork - to stop the movement of stolen OP tokens that have not yet been stolen or sold, as the foundation believes that "using centralized control to attempt partial recovery would set a significant precedent."

Security vulnerabilities and the illegal process of obtaining cryptoassets have become a common problem for many platforms, and lawmakers are eagerly looking for solutions.

It boils down to the signature phrase: “Not your keys, not your coins,” Crypto Fight Club project lead Ashton Wolfe told Blockworks.

“Of course, in order to protect people's wealth, governments will think that this solution can be solved by constantly hammering home regulations,” Wolfe said. “Unfortunately, this still hasn’t worked because it is a very slow process and users refuse to upload private documents to these counterparties in order to use the platform.”

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The post In Latest Crypto Hack, 20M Tokens Lost as Market Maker Wintermute Takes Blame is not financial advice.