Explainer-How hackers stole and returned $600 million in tokens from Poly Network

Representations of the virtual currency stand on a motherboard in this picture illustration

By Gertrude Chavez-Dreyfuss and Michelle Price

WASHINGTON (Reuters) -Hackers pulled off the biggest ever cryptocurrency heist on Tuesday, stealing more than $600 million in digital coins from token-swapping platform Poly Network, only to return nearly all the assets less than 48 hours later, the company said.

Here is what we know so far about the heist.

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A lesser-known name in the world of crypto, Poly Network is a decentralized finance (DeFi) platform that facilitates peer-to-peer transactions with a focus on allowing users to transfer or swap tokens across different blockchains.

For example, a customer could use Poly Network to transfer tokens such as bitcoin from the Ethereum blockchain to the Binance Smart Chain.

Poly Network was founded by Chinese entrepreneur Da Hongfei, who is currently chief executive of Neo, a blockchain platform.

According to Neo’s website, Poly Network was launched in August last year as a collaboration between Neo, crypto trading platform Switcheo and blockchain company Ontology.

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Poly Network operates on the Binance Smart Chain, Ethereum and Polygon blockchains. Tokens are swapped between the blockchains using a smart contract which contains instructions on when to release the assets to the counterparties.

One of the smart contracts that Poly Network uses to transfer tokens between blockchains maintains large amounts of liquidity to allow users to efficiently swap tokens, according to crypto intelligence firm CipherTrace.

Poly Network tweeted on Tuesday that a preliminary investigation found the hackers exploited a vulnerability in this smart contract.

According to an analysis of the transactions tweeted by Kelvin Fichter, an Ethereum programmer, the hackers appeared to override the contract instructions for each of the three blockchains and diverted the funds to three wallet addresses, digital locations for storing tokens. These were later traced and published by Poly Network.

The attackers stole funds in more than 12 different cryptocurrencies, including ether and a type of bitcoin, according to blockchain forensics company Chainalysis.

A person claiming to have perpetrated the hack said they had spotted a “bug,” without specifying, and that they wanted to “expose the vulnerability” before others could exploit it, according to digital messages posted on the Ethereum network published by Chainalysis. Reuters could not verify the authenticity of the messages.

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Coindesk reported on Tuesday that the hackers had initially tried to transfer some of the assets from one of the three wallets into liquidity pool Curve.fi, but that transfer was rejected. About $100 million was moved out of another of the wallets and deposited into liquidity pool Ellipsis Finance, Coindesk also reported.

Curve.fi. and Ellipsis Finance could not immediately be reached for comment.

But early Wednesday the hackers started transferring assets back to Poly Network into a wallet which both parties controlled. By Thursday afternoon, the hackers had returned nearly all of the assets, with just $33 million tokens frozen earlier by cryptocurrency platform Tether outstanding, Poly Network said.

It added that it was still communicating with the hackers, referring to them as “Mr White Hat” – an ethical hacker who generally works to expose vulnerabilities so they can be fixed.

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The hacker or hackers have not yet been identified.

Cryptocurrency security firm SlowMist said on its website that it has identified the attacker’s mailbox, internet protocol address, and device fingerprints, but the company has not yet named any individuals. SlowMist said the heist was “likely to be a long-planned, organized and prepared attack.”

Despite the purported hacker posing as a so-called “white hat”, an ethical hacker who had “always” planned to give the money back, according to the messages published by Chainalysis, some crypto experts are skeptical.

Gurvais Grigg, chief technology officer at Chainalysis and former FBI veteran, said on Wednesday that it was unlikely that white hat hackers would steal such a large sum and that they may have returned the money due to the difficulties of laundering it.

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(Reporting by Michelle Price in Washington and Gertrude Chavez-Dreyfuss in New York; editing by Richard Pullin and Marguerita Choy)

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