Shezmu Hack Unveiled: How $5M Was Stolen and Partially Recovered

Shezmu, a decentralized finance (DeFi) protocol, recently fell victim to a $5 million theft after a hacker exploited a vulnerability in its vault system. In an unexpected move, Shezmu negotiated with the hacker and managed to recover most of the stolen funds.

How did the attacker pull off this audacious heist? What steps did Shezmu take to mitigate the damage?

Here’s a breakdown of the events:

The Hack: Exploiting a Major Flaw

The attack occurred when the hacker found a flaw in one of Shezmu’s vaults. This allowed him to mint unlimited collateral and take out loans in ShezUSD without any limits. Using this loophole, the hacker was able to drain around $5 million from the platform.

Instead of pursuing legal action, Shezmu decided to negotiate with the hacker, offering a 10% bonus if the stolen tokens were returned. The hacker countered with a demand for 20%, and Shezmu agreed. This deal put an end to further losses and avoided legal complications.

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Returning the Funds: The First Step to Recovery

In less than a day, the hacker started to return the stolen asset, first, it was DAI alongside, 419.18 ETH including wETH. Shezmu has since provided assurance of recovery of all the remaining funds and the recovery of the stolen capital.

Shezmu has laid out a plan to support the liquidity providers (LPs) affected by the hack. LPs holding ShezUSD and ShezETH paired assets on Curve, Balancer, and Beefy will be identified through screenshots. These LPs will receive an airdrop covering 80% of the lost liquidity. The remaining 20% will be compensated through debt tokens, which can be redeemed using protocol fees and treasury assets.

Shezmu has also activated recovery mode for its Balancer ShezETH pool. This allows LPs to withdraw their funds based on their investments but prevents new deposits or swaps for now. The protocol plans to release a full post-mortem report to explain what happened and detail the steps it’s taking to prevent future incidents.

Do you believe the negotiation strategy employed by Shezmu was effective?