The world of decentralized finance (DeFi) was recently hit by a major security incident that resulted in the loss of hundreds of millions of dollars’ worth of Wormhole Ether, a Solana-based asset pegged to ETH.
In February 2022, this alleged security incident stunned the DeFi community and left many people questioning the stability and security of these decentralized networks.
Wormhole was an inter-blockchain bridge that linked assets between the blockchains of Ethereum and Solana.
It was touted as a major breakthrough in the DeFi space, enabling seamless swapping of real ETH to Wormhole ETH, a Solana-based token allegedly pegged to the price of ETH.
However, the bridge was not as secure as people thought, and a large amount of funds was lost in a matter of hours.
Incredibly, the loss was bailed out by Jump Crypto, a multi-billion dollar trading firm that was a prior investor in Wormhole.
The swift rescue left many observers part impressed and part stunned, questioning how such a large “hack” could receive immediate forgiveness.
Now, on-chain forensics has linked those funds to a leveraged bet on LidoDAO, Ethereum’s largest staking service.
On January 30, 2023, Chainalysis detected the first movements of the stolen Wormhole Ether. The owner used a series of looping transactions involving LidoDAO’s staked ETH (stETH) and MakerDAO’s stablecoin DAI to become the world’s fifth-largest stETH holder.
Known as a liquid staking token, 1 stETH is a promissory note that is expected to equal 1 ETH when Ethereum finalizes its Shanghai upgrade this year.
This upgrade will allow withdrawals from its Beacon Chain, and shortly after that time, LidoDAO plans to allow holders to use its protocol to redeem their stETH for ETH.
The instigators of the Wormhole heist converted a large amount of their stolen funds into stETH and then into LidoDAO’s stETH.
They used the stETH as collateral to borrow DAI from MakerDAO, which they used to buy more stETH. They repeated this process until they amassed the world’s fifth largest holding of stETH.
This latest development in the Wormhole heist highlights the need for increased security measures in the DeFi space. While decentralized networks offer the potential for greater financial freedom, they also carry increased risk.
