Harmony’s Horizon Bridge Crisis — Hard Fork Compensation Update

Harmony’s Horizon bridge hack is a key crypto event that has been on the news for a couple of weeks now. The firm came under an attack in late June 2022, resulting in the loss of tokens worth nearly $100 Million USD in form of various altcoins. The firm did promise to compensate its clients for the loss of their assets. But the proposed method for compensation has come under scrutiny resulting in a series of events that have greatly impacted its value in the market.

About Harmony

Harmony is an Ethereum EVM platform launched by Binance as part of its IEO (initial exchange offering) in May 2019. Harmony primarily addressed the problems found in traditional blockchains when it comes to bridging scalability and decentralisation without compromising on security or affecting production output.

It managed to resolve this issue by creating a next-generation sharding-based blockchain which is fully scalable, provably secure and energy efficient. This helped it provide customers with low latency and a low-cost environment helping increase business throughput.

What’s Horizon Bridge?

The Horizon bridge is a proprietary cross-chain technology that allows the exchange of crypto assets between Ethereum, Binance Smart Chain and Harmony blockchains. The main purpose of this bridge is to enable the transfer of assets between the Ethereum/Binance smart chain to Harmony and vice versa. Users can exchange their assets for either of these tokens in a ratio of 1:1.

The Hack Attack

The attack took place on 24-Jun-2022 which was revealed by Harmony on its official Twitter account. According to the post made by the firm, it identified a theft of digital assets worth US$100 Million which took place via a cyber attack earlier that day. The attack seems to have taken place by exploiting their validation scheme which required only 2 out of 5 validation nodes for most transactions. But this has been updated to 4 out of 5 validation nodes post the attack. A detailed analysis showed that assets were stolen from nearly 50,000 wallets and across different altcoins such as FRAX, WETH, AAG, AAVE, SUSHI, FXS, DAI, USDC and USDT. The firm immediately launched an investigation to trace and recover stolen assets and a detailed account of the attack from the firm can be found here.

Compensation Proposal & Backlash from Community

The firm did commit to returning its clients’ funds, but its proposed method of reimbursement came as a shock to the whole market. The firm declared in an official blog post on 27-July-2022 that it has come up with two proposals after much consideration and both involved refunding clients with assets in form of Harmony’s One token. Further, the firm claims that tokens used for reimbursement will be minted via a hard fork. This didn’t involve the community or release of any DAO and was more of a centralised approach taken directly by the firm’s management.

• The first proposal hinted at 100% reimbursement over a period of 3 years which required minting 4.97 Billion ONE tokens. This equates to monthly minting of nearly 138 Million tokens.
• The second proposal is reimbursement of 50% of the client's assets with the minting of 2.48 Billion ONE tokens over a 3-year duration. This equates to monthly minting of 69 Million tokens.

Given the fact that the firm’s tokens are low-valued altcoins with huge volumes already in circulation, additional minting of new coins will further lower the value of ONE token. But that is not the main point of concern, the firm’s proposal to further mint new tokens is viewed as a centralised financial mechanism. This type of direct decision-making from the company which doesn’t involve community or creation of any DAO is clearly viewed as the antithesis of decentralized finance architecture resulting in a huge backlash from the community.

The company’s decision to mint new tokens for compensation rather than using tokens currently in their possession or other alternatives is viewed as a move that could potentially drive ONE token’s value to rock bottom. The firm is set to vote on this proposal in a two-week duration from 1-Aug-2022 to 15-Aug-2022.

The firm’s vote on hard fork alongside Celcius Network’s second hearing in the court of New York on 8-Aug-2022 will be two major events to look out for in the coming weeks.