Pluto (Harbor) on the fate of DeFi after KelpDAO

**Nic** (0:11)
All right, I'm sitting down with Pluto. Pluto worked on one of the very first DEXs, Airswap, and then worked at Nine Realms, which was a Thorchain development company, and then is now working on something new called Harbor, which we'll talk about. But the purpose of today's conversation is to do a little postmortem on the KelpDAO hack, all of the unhinged nonsense that went around there. And then I think really, you know, a lot of people are having this kind of come to Jesus moment with DeFi, where there's a lot of soul searching, and we're wondering, is there a point to still doing DeFi?
A lot of people are worried about the exposure surface of DeFi, whether it's safe in its current form. You know, it looks like this hack was actually sort of like an old fashioned one. It wasn't even necessarily a sort of smart contract exploit. But, mythos coming out, I don't know if we're worried about that. People are worried. Long time DeFi people that I know are wondering, are we getting paid for the risks that we're taking, putting cash into DeFi? So I think we're going to cover all that anyway. If you want to add anything to your introduction, please.

**Pluto** (1:15)
No, I think that about covered it. It's been a very interesting long journey. But, you know, I just say like, yeah, my expertise is in crypto infrastructure and specifically cross-chain, which I feel like some of the vectors in this particular exploit kind of touched on with the involvement of LayerZero's bridge and DVNs and basically cross-chain bridging specifically.

**Nic** (1:40)
Yeah. I mean, I think you actually have a fantastic sort of resume when it comes to sort of like diagnosing these problems. And, you know, it's cool that there's at least one person that's still optimistic about this space and still building it. It's nice to see. All right. So KelpDAO. I never heard of KelpDAO.
I always kind of like vaguely thought restaking was a bad idea, but without knowing specifically why. All these layered derivatives give me the heebie-jeebies. And actually what happened reminds me a lot of the the reserve mutual, the money market mutual fund breaking the buck around the time of when it was. It was full of layman commercial paper. And this thing that everyone thought was meant to trade at one was starting to not trade at one. But there are a lot of other financial products that assumed that it would always trade at one. And when it started not to be worth one, all hell broke loose. And in that case, you know, it was bailed out. So we don't have that in crypto.
So do you want to kind of summarize what happened here, the sort of like very complex interplay between these protocols and what happened last week?

**Pluto** (2:47)
Yeah, absolutely.
So I'll start by saying that, you know, I'm not an expert on Aave in particular. Aave just happened to be part of the blast radius of this particular attack.
But one of the reasons why people want to exploit bridges is because there's value on one chain, and you can possibly use that bridge to then mint or unlock value on a different chain. So in this particular case, what the attackers were really after was ETH or RS ETH on the Ethereum mainnet where the actual Aave markets lived, where all of this TVL that they could access and drain using this inflated collateral or this minted collateral out of thin air. The way that they were able to do that was by effectively exploiting the OFT, which is basically a cross-chain boundary bridge between two chains. In this case, it's an implementation provided by LayerZero. But the infrastructure can actually be run by anyone. I think that's where this gets a little bit tricky or complicated and where finger-pointing comes into play, is that sometimes the infrastructure is run by a consortium of LayerZero and potentially the foundation team and maybe potentially other teams involved as well. That would be a proper DVN, which essentially stands for decentralized validator network.
You should have these many parties that are all watching the transactions on the source chain and testing them so that the destination chain properly unlocks the value. For example, I'll just give you a short explanation of how a transaction like this would occur. If you have a token, just call them OFT tokens, and you want to send them from Ethereum to Arbitrum, the 100 tokens on Ethereum would get burned or locked by the OFT implementation, and then a LayerZero packet would get emitted on Arbitrum, and then you'd have the DVNs, all these DVNs which are basically attesting that the payload hash was in fact correct. Then after the threshold verification, whether that's one of one or three of three, or hopefully many of many, the destination executes and the 100 is minted and released on the destination chain, which in this case, it was the opposite way. They were trying to lock a value which was not actually held on Arbitrum, and they effectively spoofed a packet saying that Arbitrum received 116,000 RS ETH, and now you're clear to go ahead and release that to this address on maintenance of Ethereum. So that was basically the crux of the whole hack, was basically a spoofing attack, and we can get into how they actually did that.