The optimal Ethereum heist: attacking the Parity wallet (part III)

[continued from part II]

To recap: there are several mysterious questions around how the attacker(s) who discovered a critical vulnerability in a popular Ethereum smart-contract went about exploiting that flaw to steal funds:

  • Only exploited some of the vulnerable contracts, even though all targets are equally easy to locate
  • Skipped contracts containing more funds in favor of going after lower-value targets with lower returns

At first, this does not seem consistent with an attacker driven by profit motivation. Armed with a 0-day exploit, the optimal strategy is systematically plundering the richest targets first— on the assumption that once people get wind of the vulnerability, they will race to defend their contracts, reducing the chances of successful exploitation.
But on second thoughts, the attacker may have been operating with another constraint in mind: potential PR backlash against the theft. Consider the three contracts that were targeted:

  • SwarmCity: a self-described “decentralized commerce platform” which raised funds with a resale of its SWT tokens.
  • Edgeless Casino: Online gambling website operating on the ethereum blockchain, which crowdfunded itself by issuing EDG tokens.
  • æternity: a platform for “scalable smart contracts interfacing with real world data” according to its website. The development of this project was also funded by, you guessed it, an initial coin offering. [ ]

Compare this to some examples of wallets that were left untouched in spite of having significant holdings:

  • BAT: Basic Attention Token, affiliated with the Brave browser project. Brave aims to shift the dominant revenue model for websites away from advertising (which leads to a race to the bottom in privacy, with increasingly invasive data collection on all users) and towards voluntary contributions powered by micro-payments.
  • ICONOMI: A meta-platform for managing other cryptocurrency assets
  • This one has a buzzword salad of “distributed global platform that connects exceptional startups, experts and investors worldwide”

There are at least two theories on why this group was spared and the former unlucky group exploited, and both hinge on the same premise: the possibility of a hard-fork that would reverse all theft transactions.

Recall that this drama played out once before: the DAO contract had raised close to $150M in ether at the prevailing exchange rates when it was successfully attacked, with the perpetrator walking away with $80M of those funds collected from investors. Or more precisely, they would have walked away with that tidy sum were it not for the Ethereum Foundation stepping in with a deus ex machina. In an ironic echo of the 2008 crisis which partly inspired Satoshi’s development of Bitcoin— too-big-to-fail institutions on the verge of collapse bailed out by intervention-happy regulators eager to rescue the ecosystem at all costs— the Foundation engineered the blockchain version of historical revisionism, returning stolen funds back to the DAO. At least that was the objective, but it did not exactly result in a clean undo. While the majority of hash power went along with this act of deliberate tampering with the ledger, a splinter faction to continue running with the original version which became the altcoin Ethereum Classic.

That history raises an important question for any enterprising criminal contemplating large-scale mayhem on the Ethereum blockchain: what is the threshold for a hard-fork? At what point does the Foundation deem a particular address as too-big-to-fail? Is there a version of the Federal Reserve “systemically important financial institution” criteria that decides which ones merit a bail-out in case of security breaches? There are three plausible theories:

  1. Value-at-risk. DAO breach resulted in the loss of $60M before the funds were returned with the bailout. The Parity attack netted ~$30M, suggesting the attacker stopped about half-way to that previous mark. But these numbers are deceptive because the price of Ether in USD has appreciated more than 10x since the DAO debacle. So measured in native currency, the current theft is dwarfed by the DAO.
  2. Public perception of the affected entities. The Brave browser presumably enjoys grass-roots support, because it is an underdog battling commercial behemoths (MSFT IE/Edge & Google Chrome) on behalf of users in a bid to improve user privacy online. This is exactly the type of project everyone wants to cheer on to a successful launch. Edgeless Casino is a dodgy gambling site sitting in a murky area of regulation that no one will shed any tear over. Taking away money used to fund Brave development would likely result in a public outcry. Robbing the casino would merit a shrug or even inspire schadenfreude.
  3. Old-school crony capitalism: only individuals with close connections to the Ethereum Foundation get bailed out. Unlike previous cases where public information about wallet owners can be used to make an informed assessment, this relationship is more difficult for an attacker to gauge ahead of time.

Either way, the attacker succeeded by this criteria. No one is seriously contemplating a hard-fork to reverse this particular theft. (In fairness, the DAO had a built-in safeguard to stop funds movement for several weeks after the theft. That feature greatly simplified the intervention: because the funds could not move around or taint other addresses, required blockchain edits to undo this action were limited to a few transactions. By comparison, the Parity wallet thief is free to move funds around. Correctly undoing the breach may involve reversing not only the original theft transactions but also every other transaction dependent on it in a ripple effect.

So it turns out that crime on the Ethereum blockchain does pay after all—but only when the perpetrator has the good sense to stop short of crossing the line that would trigger a hard-fork, even if that means deliberately following a seemingly “suboptimal” attack strategy. The optimal Ethereum theft is one that walks away with an amount just below the threshold of value/significance/popularity that would invite intervention by means of a hard-fork.