Shezmu: The $4.9 Million Exploit

An In-Depth Analysis of Shezmu's $4.9 Million Vault Exploit: Exploring the Vulnerabilities, Negotiations with the Hacker, and the Implications for Security Practices in the DeFi Space.

October 04, 2024

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TL;DR

On September 20, Shezmu experienced a $4.9 million exploit stemming from a critical vulnerability in their vault. Despite the breach, the team swiftly negotiated with the hacker, resulting in the recovery of funds minus a 20% bounty. This incident underscored significant security oversights and raised important questions about control and accountability in the DeFi ecosystem.

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On September 20th, Shezmu's vault faced a major breach, losing $4.9 million due to a critical flaw in their system.

The vulnerability allowed anyone to mint collateral freely, enabling the hacker to exploit this loophole and borrow a vast amount of ShezUSD, effectively draining the protocol's resources.

In an unexpected move, Shezmu opted for negotiation rather than immediate retaliation. They proposed a 10% bounty for the safe return of the stolen funds, coupled with a 24-hour ultimatum threatening legal action.

The hacker, showing no signs of intimidation, demanded a 20% bounty instead. After a tense standoff, Shezmu conceded to the higher amount, prioritizing the recovery of their assets over a protracted legal battle.

This incident underscores a significant dilemma in the crypto industry: whether the true power lies with the hacker holding the stolen assets or with the protocol that demonstrates flexibility and strategic negotiation.

Chaofan Shou, co-founder of blockchain analytics firm Fuzzland, raised the alert:

"ShezmuTech has been hacked/rugged. ~$4.9M worth of $ShezUSD stolen."

The breach stemmed from a critical vulnerability in Shezmu's vault system, which permitted anyone to mint collateral. This flaw enabled the attacker to borrow an unlimited amount of ShezUSD, essentially printing money at will.

Just 17 days before the exploit, on September 3rd, Shezmu implemented a contract upgrade (0x8db5356ec348a991adaadfd7f366d72eccafcb0113c7ac31f1dddde9c8c3f81e).

This raises crucial questions: did this upgrade introduce the vulnerability, or did it simply fail to address an existing one?

In the rapidly evolving DeFi space, even routine upgrades can turn into ticking time bombs.

A detailed trail of addresses and transactions revealed the intricacies of the exploit:

The attacker didn't merely discover the vulnerability; they engineered a custom contract to exploit it.

In the world of DeFi, sometimes your greatest threat is the anonymous developer next door. Even the most carefully laid plans can go awry in the volatile realm of crypto.

During the exploit, Chaofan Shou made a noteworthy observation:

"Due to low liquidity, these $4.9M worth of $ShezUSD are swapped to only $700K."

Could a master heist have been thwarted by market mechanics?

As news of the attack spread like wildfire through the crypto community, Shezmu's team acted swiftly. Within hours, they issued a statement urging users to avoid the dApp while they conducted an investigation.

Shezmu reached out to the attacker with a proposition they hoped couldn't be refused: a 10% bounty in exchange for the safe return of the funds.

The message from Shezmu was unequivocal: cooperate and we’ll treat it as a white-hat hack; refuse, and face the full extent of the law.

However, the hacker was not easily deterred.

The ensuing on-chain negotiation was remarkably civil, given the stakes involved. Legal threats were met with courteous rebuttals, and eventually, a compromise was reached.

Soon after, the funds started to return.

Shezmu confirmed the recovery of the stolen assets, minus the agreed-upon bounty, and announced a forthcoming post-mortem report.

The community watched in real-time as a potential disaster was deftly managed, turning into a masterclass in crisis resolution.

In the aftermath, Shezmu emerged battered but resilient.

However, the plot thickens. The earlier mention of low liquidity might have been crucial to resolving the crisis.

As Chaofan Shou, the vigilant first responder, observed:

"Due to low liquidity, these $4.9M worth of $ShezUSD are swapped to only $700K."

This revelation makes the 20% bounty on the full $4.9 million suddenly seem quite appealing.

Ultimately, what truly resolved the situation? Was it the threat of legal action, the lure of a substantial bounty, or a change of heart by the hacker?

Or perhaps, it was the stark reality of a liquidity crunch that turned a black hat white.

While Shezmu's swift negotiation prevented a complete disaster, it highlights a critical oversight in their security protocols.

The team neglected to thoroughly examine their contract upgrade from September 3rd, inadvertently leaving a significant vulnerability open for exploitation.

In retrospect, was it skill or sheer luck that spared Shezmu from utter failure?

Their decision to offer a 20% bounty may have recouped millions, but it feels more like a temporary fix rather than a solution to the underlying issue.

And what accompanies this all-too-familiar scenario?

Cue the repetitive melody: yet another exploit following a system upgrade.

In the DeFi space, yesterday's patch frequently morphs into tomorrow's vulnerability, turning each upgrade into a high-stakes gamble.

In a realm where code governs, yet human error persists, who truly wields power—the developers, the auditors, or the hackers waiting in the wings?

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