Merlin Labs Profit Inflation Vulnerability

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Merlin Lab Logo/Homepage

The newly deployed (and not yet intended to be public) Merlin Labs smart contract allowed the attacker to profit a higher value in MERL by sending a smaller amount of BNB. This was obviously a good deal, and the attacker took full advantage of it before mixing their funds on Tornado.

As a result, Merlin Labs closed, and it appears that anyone who lost funds in this or previous exploits is out of luck.

This is a global/international case not involving a specific country.

About Merlin Labs

"Merlin Lab is the highest APY auto-compounding yield aggregator on BSC." Merlin is a way to "Auto-compound & Earn BTCB, ETH, BNB & extra MERL." "Merlin Lab’s vision is to create a suite of complementary DeFi products that will operate in a harmonious ecosystem."

"User security has always been Merlin Lab’s top priority." "It has been always a top priority and it is for the simple reason that without security the platform can't be run." "Our development team has implemented routine checks of our smart contracts and codes to continuously bring improved security standards into the Merlin ecosystem." "Merlin Labs was audited by Hacken on May 15th." "According to the assessment, the Customer's smart contracts are well-secured." "Our team performed an analysis of code functionality, manual audit, and automated checks with Mythril and Slither."

The Reality

"The Merlin Dev team had deployed the Alpaca single asset vaults onto the Mainnet for testing this morning. This vault was not supposed to be publicly available or ready to launch to the public."

What Happened

"On June 29, 2021 Merlin profit inflation vulnerability was exploited which resulted in the loss of $330K."

The specific events of the loss and how it came about. What actually happened to cause the loss and some of the events leading up to it.

Key Event Timeline - Merlin Labs Profit Inflation Vulnerability

Date	Event	Description
June 1st, 2021 1:31:26 PM MDT	Promotion On Reddit	Merlin Lab posts a Reddit post promoting their platform.
June 29th, 2021	Main Event	Expand this into a brief description of what happened and the impact. If multiple lines are necessary, add them here.
June 29th, 2021 3:38:00 AM MDT	Peckshield Root Cause Published	Peckshield publishes the root cause for the vulnerability.
July 18th, 2021 11:31:51 PM MDT	BlockThreat Week 26	The incident is included in BlockThreat for week 26 of 2021.

Technical Details

"A total of $330k was stolen, bringing their TVL (total value lost) to $1,560,000, and putting them on par with Value DeFi as one of the few protocols to be so unsafe that they have three positions onto the rekt leaderboard."

"Via the smart contract, a hacker deposited 0.1WBNB into the vault and then manually transferred 1000BNB into the contract to trick the contract into thinking it has received 1000BNB in rewards, which resulted in the minter producing MERL rewards."

"Merlin's reward system gave users Merlin tokens for every $ in performance fees they brought in. It was rewarding 35 MERL (~$500 at the time) for every BNB (worth ~$300). When calculating the profit of the strategy, it converted the received BNB to WBNB. The increase in WBNB balance was then seen as the profit. By sending BNB to the contract directly, it is also converted to WBNB and considered "profit". By depositing BNB in the contract, the attacker could harvest and all that BNB would be assumed to be rewardable profit. Straight to ETH, then Tornado and it’s gone."

Peckshield:

Total Amount Lost

The total amount lost has been estimated at $330,000 USD.

How much was lost and how was it calculated? If there are conflicting reports, which are accurate and where does the discrepancy lie?

Immediate Reactions

How did the various parties involved (firm, platform, management, and/or affected individual(s)) deal with the events? Were services shut down? Were announcements made? Were groups formed?

"The third time’s a charm for Merlin Finance. Why do people keep going back?"

"Thank you for your patience. It has been identified that this was an economic exploit."

Ultimate Outcome

"Merlin is officially closed."

The incident was included in Rekt:

Total Amount Recovered

There do not appear to have been any funds recovered in this case.

What funds were recovered? What funds were reimbursed for those affected users?

Ongoing Developments

What parts of this case are still remaining to be concluded?

General Prevention Policies

It is impossible to prove that smart contracts are completely secure, and they should be treated in a similar manner to hot wallets. The majority of funds should be stored in multi-signature wallets with offline keys.

Smart contract hot wallets can improve security through third party security auditing, or providing a bug bounty. Keep funds in the hot wallet minimal and expect losses. Smart contract insurance, setting up a self insurance treasury, or an industry insurance fund may also be possible, which could allow for greater live liquidity.

Individual Prevention Policies

No specific policies for individual prevention have yet been identified in this case.

For the full list of how to protect your funds as an individual, check our Prevention Policies for Individuals guide.

Platform Prevention Policies

Policies for platforms to take to prevent this situation have not yet been selected in this case.

For the full list of how to protect your funds as a financial service, check our Prevention Policies for Platforms guide.

Regulatory Prevention Policies

No specific regulatory policies have yet been identified in this case.

For the full list of regulatory policies that can prevent loss, check our Prevention Policies for Regulators guide.