Defrost Finance V1 Key Compromise/Rug Pull

Notice: This page is a freshly imported case study from the original repository. The original content was in a different format, and may not have relevant information for all sections. Please help restructure the content by moving information from the 'About' section to other sections, and add any missing information or sources you can find. If you are new here, please read General Tutorial on Wikis or Anatomy of a Case Study for help getting started.

Notice: This page contains sources which are not attributed to any text. The unattributed sources follow the initial description. Please assist by visiting each source, reviewing the content, and placing that reference next to any text it can be used to support. Feel free to add any information that you come across which isn't present already. Sources which don't contain any relevant information can be removed. Broken links can be replaced with versions from the Internet Archive. See General Tutorial on Wikis, Anatomy of a Case Study, and/or Citing Your Sources Guide for additional information. Thanks for your help!

Defrost Finance Logo/Homepage

Defrost Finance, the platform behind the stablecoin H2O, which aims to revolutionize finance, suffered a second attack on V1, following the initial exploit on December 23, 2021. The contract had originally been audited by CertiK in November 2021. After shutting down V2 for further investigation, the platform repeatedly assured users that V1 was not affected. Shortly thereafter, all funds were taken from the V1 version by an individual with access to the private keys. After multiple firms called out their concerns that the project had rug pulled, they reportedly were offering the hacker a 20% bounty. The following day all funds had been returned with no bounty going to any hacker. They were distributed to users in the next couple weeks.

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

About Defrost Finance

"Unfreeze Your Way to Wealth - Defrost Finance is the platform behind the next generation stablecoin and provides remunerative investment opportunities. A fully fair launch, decentralized project, its aim is to change the world of finance for good."

"A New Stablecoin Minted with LP Tokens - Backed by Liquidity Provisions tokens, H2O is the stablecoin of the future, maintaining a 1:1 peg to the US dollar at all times. It is safely overcollateralized and capable of powering any financial instrument."

"Defrost is a community-based project. Participants can deposit their assets in Liquidity Pools from swaps and mint H2O to acquire MELT, the platform’s governance token. This not only allows you to stake assets but gives you a seat at the table when decisions are made."

"The Defrost V1 is a protocol that allows users to utilize liquidity pool (LP) tokens and other pool tokens from Avalanche protocols as collateral for generating H2O. It has two vital parts, the vaults collecting collateral for generating H2O and the H2O token itself, which circulates on the market."

"Vault participants deposit LP assets in Defrost V1 vaults as collateral for generating H2O." "Over time, H2O holders acquired the soft-pegged token for a variety of purposes, including leveraging their positions, participating in H2O mining, getting transaction fees by providing liquidity to dexes, or speculating on the price of H2O itself when de-pegging occurred."

"H2O holders interacted with four contracts in Dexes, including Curve, Platypus, Trader Joe, and ELK."

"3/4 The same - or another - hacker also managed to steal the owner key for a second, much larger attack on the V1.

"The far-larger second attack occurred on Christmas Eve, the spokesperson continued, with another hacker or hackers “[managing] to appropriate the private key and used it to add a fake collateral token and price oracle, then minted 100 million H20 tokens … The hacker then liquidated the existing vaults by manipulating the vaults’ oracles and draining funds.”"

"In a tweet thread posted on Sunday, the team said a first attack used a flash loan to drain funds out of its V2 product. A second larger attack used the owner key to exploit V1. The protocol, which offers leveraged trading on the Avalanche blockchain, didn’t say how much had been taken.

Blockchain security firm PeckShield, citing “community intel,” said at the time that the exploit may have been a rug pull that made off with $12 million. Earlier Monday Certik, also a security company, said it had been unable to contact members of the team and posted a graphic indicating it was treating Defrost as an exit scam. Defrost's Twitter account isn't configured to accept private messages."

We are currently working on finding out how exactly the aggressors managed to obtain the key and used it to exploit the protocol."

"It must here be considered that there were collateral losses to the vaults during the Terra/UST crash earlier this year, which lead to 923,081.08 units of H2O backed by the UST/USDC — Pangolin (SV_II) vault actually being backed by almost zero value. This became bad debt in the system and should be considered as a factor putting downward pressure on the fair price. In other words, the theoretical fair value of H2O should also take into account collateral adequacy."

"The total H2O debt in the V1 vaults was 13,012,640.80, of which, 923,081.08 units were bad debt. Therefore, the theoretical fair value of H2O will be (13,012,640.80–923,081.08)/13,012,640.80 = 0.929 USD.

We intend to use 0.929 USD/H2O as the unit value of adjusted H2O debt in the refund calculation. (For more details, please feel free to check the G column, named ‘Adjusted H2O Debt considering H2O fair value’ in the ‘Vault Refund’ sheet in the shared excel file.)"

"LPs in Curve, Platypus, Trader Joe, and ELK will have different weights when refunding. The weight of LPs in Trader Joe and ELK is doubled since another paired asset was needed when providing liquidity on those platforms. The weight of LPs in Curve is applied to the number of LP tokens in Curve as the unit value of the LP tokens is close to 1 USD."

"It is believed that the attacker (or attackers) added a bogus collateral token and a malicious pricing oracle to the flash loan assault to liquidate consumers. Some have claimed that the “exit scam” may have been the work of team members, including blockchain security firms Peckshield and CertiK, in addition to asset management platform DeFiYield, given that an admin key was required to exploit the vulnerability.

However, the Defrost Finance team finally responded to the claims on December 28 in an exclusive statement saying:"

‘We refute claims that the squad is comprised of tough users. As much as the incident may cast doubt on people’s perceptions, a compromised key does not necessarily mean a rug pull.’

"Defrost Finance’s primary defenses against being involved were two.

First, according to Defrost, if they had intended to stage a rug pull, they would have done it months ago when the total value locked (TVL) was getting close to $200 million.

On December 23, the day of the initial attack, Defrost Finance’s TVL, according to DefiLlama, had dropped to just $13.14 million. When our TVL was 15 times more than it is now, anyone behind a rug pull would have likely misled investors.

Second, according to Defrost Finance, if they had been the culprits, they would have “fled” long ago, but they haven’t."

"On Dec. 26, Defrost announced on Twitter it had managed to recover all the funds taken in the v1 hack, sharing in a post on Medium hours later that it has begun the process of returning funds to affected users."

"Defrost Finance did not release any communication with the hacker and did not say how they recovered the funds. Notably, the firm did not disclose whether they paid a bounty to the hacker and to what amount."

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

The background of the exchange platform, service, or individuals involved, as it would have been seen or understood at the time of the events.

Include:

• Known history of when and how the service was started.
• What problems does the company or service claim to solve?
• What marketing materials were used by the firm or business?
• Audits performed, and excerpts that may have been included.
• Business registration documents shown (fake or legitimate).
• How were people recruited to participate?
• Public warnings and announcements prior to the event.

Don't Include:

• Any wording which directly states or implies that the business is/was illegitimate, or that a vulnerability existed.
• Anything that wasn't reasonably knowable at the time of the event.

There could be more than one section here. If the same platform is involved with multiple incidents, then it can be linked to a main article page.

The Reality

This sections is included if a case involved deception or information that was unknown at the time. Examples include:

• When the service was actually started (if different than the "official story").
• Who actually ran a service and their own personal history.
• How the service was structured behind the scenes. (For example, there was no "trading bot".)
• Details of what audits reported and how vulnerabilities were missed during auditing.

What Happened

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 - Defrost Finance V1 Key Compromise/Rug Pull

Date	Event	Description
December 23rd, 2022 6:14:00 PM MST	V1 Unaffected	After an exploit in V2 of the protocol, Defrost Finance posts another tweet to remind users that the V1 version of their protocol is unaffected, because it has no flash loan function available.
December 24th, 2022 12:32:47 PM MST	Oracle Replacement Transaction	The blockchain transaction replaces the oracle with a malicious one, which ultimately enables liquidation of held assets.
December 24th, 2022 8:23:00 PM MST	V1 Exploit Tweet	The team posts on Twitter to acknowledge that there has also now been a breach of the V1 protocol. "We kindly ask the community to wait for updates and refrain from using either the V1 or V2 for the moment being."
December 25th, 2022 2:51:29 AM MST	Reddit Post	A Reddit post about whether audits are meaningless.
December 25th, 2022 5:02:00 AM MST	Tweet Posted	A tweet is shared about the V1 attack, where it appears that a key was compromised, which is separate from the V2 attack.
December 25th, 2022 2:50:00 PM MST	CoinDesk Article	A CoinDesk article reports on the exploit taking funds from the platform.
December 26th, 2022 1:59:00 AM MST	CertiK Exit Scam Accusation	In a post on Twitter, blockchain security firm CertiK labels the Defrost Finance hack as a rug pull and states that they have been unable to reach the team behind the project. The team was not KYCed in order to complete the audit.
December 26th, 2022 8:20:00 AM MST	CoinDesk Refund Article	A CoinDesk article reports that hacked funds have been returned.
December 27th, 2022 12:02:00 AM MST	Recovery Of Funds	On Twitter, Defrost Finance announces that they have recovered all assets from the V1 exploit.
December 27th, 2022 3:36:00 PM MST	DeFiSecurity Post	A Twitter user running a technology security company shared allegations that the project rug pulled. They note that the exploit involved keys that were granted permissions when the project was set up, and also that there are walelt connections to an earlier FinNexus project which also had their private keys compromised.
December 27th, 2022 9:04:47 PM MST	CoinTelegraph Article	In a CoinTelegraph article, Defrost Finance denies the rug pull alleagations.
December 28th, 2022 1:25:27 AM MST	Crypto.News Article	Crypto.news reports on the denial of Defrost Finance at the V1 attack having been a rug pull.
December 30th, 2022 8:02:00 AM MST	Funds Retrieved	The Defrost Finance platform says it's retrieved all funds after offering a bounty to the hacker.
January 6th, 2023 11:40:56 PM MST	Refund Spreadsheet	A refund spreadsheet is prepared an an article is written via Medium to explain how the refund system is intended to work.
January 10th, 2023 5:15:28 AM MST	Refund Contract	The refund contract is now online for users and advertised on Medium.
January 10th, 2023 5:23:00 PM MST	Refund Contract	The refund contract is now shared on Twitter.

Technical Details

This section includes specific detailed technical analysis of any security breaches which happened. What specific software vulnerabilities contributed to the problem and how were they exploited?

Total Amount Lost

$12,850,277 -= $12,850k.

The total amount lost has been estimated at $12,850,000 USD.

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?

Ultimate Outcome

What was the end result? Was any investigation done? Were any individuals prosecuted? Was there a lawsuit? Was any tracing done?

Total Amount Recovered

The total amount recovered has been estimated at $12,850,000 USD.

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?

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.