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The Most Infamous Crypto Hacks: Part 1

June 13, 2024

With its allure of decentralization, transparency, and security, the world of cryptocurrency has captivated a wide range of individuals, from passionate supporters to those who, unfortunately, are seeking to take advantage of the system. Over a relatively short history of the crypto industry, many malicious individuals have tried to take advantage of weaknesses in the crypto ecosystem, resulting in some of the most well-known hacker attacks in the industry's history. Let's delve into the most notorious hacker attacks in the cryptocurrency space, delving into their consequences, underlying causes, and the valuable lessons the crypto community has learned.

Mt. Gox Hack (2011-2014)

The Mt. Gox hack remains one of the most infamous incidents in the history of crypto assets. When it failed in February 2014, there were legitimate concerns that it might destroy the emerging cryptocurrency ecosystem before Bitcoin was even five years old. At its peak, Mt. Gox was the world's largest Bitcoin exchange, handling well over two-thirds of all Bitcoin transactions. Therefore, the news of the exchange abruptly halting withdrawals, citing technical issues, in February 2014 was shocking for crypto enthusiasts. 

The later analysis showed that Mt. Gox had lost more than 880,000 Bitcoins, worth approximately $58 billion today, due to a long-term systematic hack (or rather a series of hacks) that went undetected for years. The hack led to Mt. Gox's bankruptcy and caused widespread panic and loss of confidence in the crypto market. Victims are still dealing with the aftermath of this hack, suing and waiting for compensation.

Ten years have passed, yet too little is known about the attackers and whether there was one attacker throughout these years or a new one in each instance. Moreover, the attacker's methods are also rather suspected than known. In the instance of the June 2011 breach, it is confirmed that the hacker managed to attain access to the Mt. Gox server through an account with administrator-level privileges. However, how they came to access such an account still needs to be determined. Some people think the hacker acquired the information during the theft of the complete Mt. Gox user database, along with the 79,956 BTC in the so-called 1Feex breach (named so after the first symbols of the address some stolen Bitcoins went to).

Mark Karpeles, CEO of Mt. Gox, claims that he was unaware that the exchange had been depleted until he examined the cold wallets in mid-February 2014. Nevertheless, Mt. Gox encountered problems with Bitcoin withdrawals beginning in August 2013, which should have prompted concern. Subsequently, Karpeles attributed the withdrawal issues in 2014 to the "transaction malleability" bug, but the situation indicated serious mishandling at the exchange, particularly regarding his method of asset storage. Karpeles has never officially verified the specifics of his "tailored" cold wallet-hot wallet system, which many deemed more than suspicious. 

This hack is still discussed today, with people intrigued by how such a popular and trusted platform could have been run so poorly security-wise. Hopefully, it taught many crypto enthusiasts to be more conscious of the products and services they choose to work with and the security measures they employ. 

DAO Hack (2016)

The DAO was a revolutionary initiative established on the Ethereum blockchain with the goal of raising funds for Ethereum-based projects in a decentralized way. Quickly gaining momentum, the DAO ultimately secured an astonishing $150 million, far beyond what was expected by the founders. Yet, in June 2016, the DAO's code was exploited by an unidentified attacker, who siphoned off around one-third of its funds, amounting to more than $50 million worth of Ether. This event resulted in a controversial hard fork of the Ethereum blockchain, leading to the emergence of Ethereum Classic (ETC) and Ethereum (ETH) as distinct cryptocurrencies.

The intruder utilized a "reentrancy attack," exploiting a "fallback" function in Ethereum's then-new Solidity coding language, to drain almost all of the DAO's $150 million worth of ETH over a few weeks. Unexpectedly, the attack had a silver lining - it was bidirectional. In response to the DAO's plight, a group of "white hat" Ethereum hackers employed the same exploit against the attacker, effectively creating a tit-for-tat situation. These hackers, known as the Robin Hood group, managed to recover a significant portion of the stolen funds using these tactics, although not all of them. 

Moreover, the DAO's decentralized nature made it challenging to fully mitigate the risk of future attacks. So, the risk of two groups—malicious and white hackers—continuously fighting each other seemed very plausible. One of the most widely discussed solutions was Ethereum's hard fork. The suggested "Hard Fork" of the Ethereum blockchain was intended to address the issue that impacted the DAO. It also included an "irregular state change," which involved seizing an attacker's funds to restore the stolen funds to their original owners. While the idea received initial support from many, it led to intricate long-term consequences that sparked conversations within the Ethereum community about the reliability of the whole ecosystem. 

If Ethereum could be modified to confiscate a user's assets – even if that user was a hacker – it implied that the same action could be taken against anyone else. Critics of the hard fork argued that this potential scenario would be more damaging to Ethereum's integrity than allowing a hacker to control 5% of the network. Eventually, Ethereum was divided into Ethereum Classic (ETC) and Ethereum (ETH). 

Another interesting point about the DAO hack is that the perpetrator has yet to be identified. The hack took advantage of vulnerabilities that the DAO team had already discovered. They were in the midst of addressing these issues before the scheduled distribution of funds. As you may imagine, the timing of these events has led to speculation that the hack was orchestrated from within, but this is purely conjecture.

The cautionary example of the DAO played a crucial role in shaping the industry's approach to security. Some experts believe that prior to this incident the industry prioritized speed over security, and the entire blockchain security sector emerged in response to it. Moreover, the DAO hack shifted crypto funding models, favoring direct-to-investor ICO sales over collective organizations. 

Final Thoughts

The history of the cryptocurrency industry is littered with high-profile hacker attacks that have shaken investor confidence, undermined trust, and raised questions about the security of digital assets. While these incidents have undoubtedly had a significant impact on the crypto space, they have also served as valuable learning experiences, prompting industry stakeholders to prioritize security, implement best practices, and develop innovative solutions to safeguard against future threats. 

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