From the $196.9 million exploit to its recovery, learn about the role of flash loans in the Euler Finance hack and how to protect yourself from similar attacks.
Written by Van, perfected by ChatGPT
Euler Finance, a DeFi platform built on Ethereum, recently experienced a massive flash loan attack, which saw nearly $196.9 million drained from its smart contracts. Surprisingly, the hacker eventually returned the funds after a series of negotiations, resulting in an over 13% rise in its EUL token after the announcement.
The Euler Finance Crypto Hack: A Full Timeline
The exploit drained Euler Finance of $196.9 million in various cryptocurrencies. Here’s the full timeline:
- On March 13, the Euler Finance hacker conducted several transactions, resulting in the loss of millions of dollars worth of tokens, including Dai (DAI), USD Coin (USDC), wrapped Bitcoin (WBTC), and staked Ether (StETH). The total value locked in Euler’s smart contracts plummeted from over \(311 million to \)10.37 million. As a result of these transactions, funds were either lost or frozen in 11 different decentralized finance (DeFi) protocols, such as Balancer, Yearn.finance, and Yield Protocol.
- On March 14, Euler took action to retrieve its funds by disabling its susceptible etoken module and donation function. As a first step, it collaborated with auditing firms to investigate the underlying cause of the attack. Meanwhile, Euler attempted to negotiate a reward with the hackers while trying to contact them.
- On March 15, Euler issued an ultimatum to the hacker, demanding a return of 90% of the stolen funds and threatening to offer a \(1 million reward for information that would result in the hacker's arrest. This deal would have allowed the hacker to keep \)19.6 million. The hacker, however, continued to move the funds as they pleased. One victim managed to receive 100 Ether after persuading the hacker that their life savings were lost in the Euler hack. Over a few days, the hacker proceeded to return the stolen funds, each varying in worth.
- On March 18, the recovery process began as the hacker returned \(5.4 million to Euler. Initially, there were doubts when the hacker used the crypto mixer Tornado Cash to launder \)1.8 million just three days after the attack.
- On March 21, Euler launched a $1 million bounty reward against the hacker after being ghosted mid-conversation while trying to strike a deal.
- From March 25, the hacker started returning the stolen assets in large numbers on multiple occasions. In the next few days, the hacker made inconsistent repayments, with the largest amount being $102 million in ETH.
- On 28 March, the hacker used on-chain messages to communicate with the public by sending messages to their address. In these messages, they expressed regret and vowed to refund the remaining funds as soon as they can.
- On April 4, Euler Finance announced the total possible recovery of the lost funds, thus ending the $1 million bounty. This marks a positive conclusion to one of the biggest crypto hacks of this year.
To understand how the hacker pulled off this heist, let’s take a closer look at flash loans - a critical component of the attack.
Understanding Flash Loans
Source: Etherscan Information Center
Flash loans have emerged as a fascinating innovation in the world of decentralized finance (DeFi), offering a unique twist on borrowing that is capturing the imagination of traders and developers alike. With platforms like Aave and Uniswap leading the charge, flash loans are transforming the way we interact with cryptocurrency and opening up exciting new avenues for profit.
At their core, flash loans allow users to borrow huge sums of digital currency without needing to put up any collateral. The catch? You have to repay the loan within the same transaction. If you can pull it off, it’s a fantastic way to access large amounts of capital without needing to tie up your own funds.
One of the most popular uses for flash loans is arbitrage, where traders take advantage of price discrepancies across various decentralized exchanges (DEXs). By utilizing a flash loan, savvy investors can exploit these differences to generate quick and (mostly) risk-free profits.
Despite their appeal, flash loans are not without their challenges. In DeFi, security is always a concern, and flash loans have been at the center of several high-profile hacks, like the Euler Finance and Allbridge incidents. As the space evolves, it’s crucial for users to stay informed about potential risks and vulnerabilities.
Recent Notable DeFi Hacks
The following is a brief overview of some of the most significant DeFi hacks since the beginning of 2023:
- Maximal Extractable Value (MEV) bots exploit (3 Apr, 2023, $25 million): During this attack, MEV bots initiated a series of swaps involving millions of dollars. However, a validator replaced the reverse transactions, resulting in significant losses: \(1.8 million in Wrapped Bitcoin ([WBTC](https://coin360.com/coin/wrapped-bitcoin-wbtc)), \)5.2 million in USDC, \(3 million in [USDT](https://coin360.com/coin/tether-usdt), \)1.7 million in DAI, and $13.5 million in Wrapped Ether (WETH).
- Allbridge (2 Apr, 2023, $0.57 million): In this case, the attacker took out a $7.5 million BUSD flash loan and initiated a series of swaps for USDT. Subsequently, they made deposits in BUSD and USDT liquidity pools on Allbridge. This activity manipulated the price of USDT in the pool.
- Safemoon (28 Mar, 2023, $8.9 million): A vulnerability in the Safemoon protocol allowed the attacker to remove SafeMoon (SFM) tokens, causing an artificial spike in the token’s price. The attacker then sold off the tokens at an inflated price, taking advantage of the situation.
- Euler Finance (13 Mar, 2023, $197 million): The hacker team exploited Euler’s borrowing capabilities, allowing them to borrow 10 times the original deposited amount. They used the remaining $10 million in DAI from the original loan to repay part of the acquired debt (dDAI) and reused the mint function to borrow again until the flash loan was closed.
- Hedera (10 Mar, 2023, $0.515 million): In this incident, attackers exploited the Smart Contract Service code of Hedera’s mainnet protocol. They managed to transfer Hedera Token Service tokens held by victims’ accounts to their own, causing significant losses.
These examples serve as a reminder of the potential risks and vulnerabilities associated with DeFi platforms and bridges. It’s crucial for investors and users to stay informed and vigilant to minimize the impact of such incidents.
Protecting Yourself from Flash Loan Attacks
As a DeFi user, you should be aware of the risks associated with flash loans and take necessary precautions. Here’s how you can protect yourself:
- Research DeFi platforms: Before using any DeFi platform, thoroughly research its security measures, auditing history, and user reviews. Look for platforms with a proven track record and transparent security practices.
- Keep up with DeFi news: Stay informed about the latest developments in the DeFi space, including new vulnerabilities, exploits, and security updates.
- Diversify your investments: Avoid putting all your eggs in one basket. By diversifying your investments across multiple DeFi platforms and crypto assets, you reduce the risk of losing everything in a single hack.
- Understand smart contracts: Take the time to learn about smart contracts and how they work. This knowledge will help you identify potential vulnerabilities and make better-informed decisions when using DeFi platforms.
- Use trusted wallets and hardware devices: Store your crypto assets in secure, trusted wallets or hardware devices to minimize the risk of theft or loss.
FAQ about Euler Finance, Flash Loans and DeFi Security
- Q1: What is Euler Finance?
A: Euler Finance is a non-custodial protocol on Ethereum that allows users to lend and borrow almost any crypto asset. Euler has raised a total of $40.8M in funding over 3 rounds. Their latest funding was raised on Jun 7, 2022, with Haun Ventures and Jane Street Capital as the most recent investors.
- Q2: What is a flash loan?
A: A flash loan is a feature in the DeFi space that allows users to borrow large amounts of cryptocurrency without collateral, as long as the loan is paid back within a single transaction.
- Q3: How do flash loans work?
A: Flash loans work by allowing users to borrow funds and use them within the same transaction. If the borrower cannot repay the loan by the end of the transaction, the entire operation is reversed, and the funds are returned to the lender.
- Q4: How to make money with flash loans?
A: One common way to make money with flash loans is through flash loan arbitrage, where users exploit price discrepancies between different decentralized exchanges to make a profit.
- Q5: What is a flash loan attack?
A: A flash loan attack is an exploit where a malicious actor uses a flash loan to manipulate the market or exploit vulnerabilities in smart contracts, causing financial loss to DeFi platforms and their users.
The Euler Finance crypto hack has brought the risks associated with flash loans to the forefront. By understanding these risks and following best practices, you can safeguard your investments and minimize the chances of falling victim to similar exploits.
Education and awareness about DeFi risks are crucial for the industry’s growth and long-term success. As the DeFi ecosystem continues to evolve and mature, the community must work together to create and maintain a secure environment for users and investors. This includes fostering a culture of security, promoting best practices, and encouraging collaboration between developers, researchers, and industry experts.
In conclusion, while flash loans have created new opportunities for traders and investors, they have also exposed DeFi platforms to new risks and vulnerabilities. The recent Euler Finance hack and other flash loan attacks serve as a reminder of the importance of security and vigilance in the ever-evolving world of decentralized finance.