Ethereum Layer 2 Kinto shuts down in wake of $1.6 million July exploit

Kinto, the “modular exchange” and Ethereum Layer 2 network that courted traders and institutional firms as a fully KYC-compliant protocol, will shut down on September 30 in the wake of a July exploit that drained $1.55 million from lending pools. 

On July 10, Kinto was hit by a sophisticated smart contract exploit that allowed an attacker to mint 110,000 fake Kinto tokens on Kinto’s Arbitrum-based Ethereum Layer 2 and dump them on the market, siphoning 577 ETH worth $1.55 million from a Morpho lending vault and a Uniswap v4 liquidity pool. The price of Kinto’s token dropped about 95% following the exploit. 

The specific vulnerability was flagged by security researchers and other DeFi platforms were notified, but Kinto slipped through the cracks. The platform was attacked mere hours after the vulnerability was disclosed. 

Kinto attempted to rebound by raising $1 million through an effort dubbed “Phoenix,” which allowed Kinto to restart trading and DeFi operations by issuing a new $KINTO token reflecting pre-hack holdings and by replenishing some of the drained liquidity pools. However, the new debt from the recovery loans made further financing difficult for the protocol. 

The shutdown announcement comes from Kinto founder Ramón Recuero, also the founder of Babylon Finance, which itself contended with $3.4 million in losses stemming from the hack of Rari Protocol. Recuero helped organize an effort to reimburse victims of that hack after the team behind Rari reversed their pledge to make users whole. 

Similarly, Recuero is promising reimbursement to some hacking victims in the wake of Kinto’s shutdown. All remaining foundation assets will be returned to the Phoenix lenders, which will recover 76% of their loan principal, according to Recuero. Recuero also pledged $55,000 of personal funds to reimburse victims of the hack who were left with bad debt on Morpho, up to $1,100 per address. Victims can also opt to receive funds if they are ever recovered. 

“We’ve operated without salaries since July, and after the last financing path fell through, we have one responsible choice left: shut down cleanly and protect users/lenders as best as possible,” Recuero wrote in the announcement. “Plenty of teams vanish into ‘zombie mode.’ We won’t. We’re doing this orderly and out in the open.”

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