After much deliberation and careful thought Neptune Mutual decided to close the cover marketplaces.
After much deliberation and careful thought Neptune Mutual decided to close the cover marketplaces. Below the reasons for the decision as well as what it means for the community.
The marketplaces will be closed using an emergency withdrawal process whereby the liquidity provided to cover pools by LPs will be returned to the wallet addresses from which the liquidity was supplied. In addition to protecting cover pool LPs, there will also be refunds to all cover policy purchasers with an existing and valid policy who have paid over 10 USD in policy fees in one transaction.
For veNPM holders, please fill out this form to receive a refund for your veNPM to NPM conversion penalty.
From the end of June there will no longer be NPM emission incentives for LPs i.e. Epoch 3 of the liquidity gauge emissions will be canceled.
Unused funds raised from financial backers will be returned to those backers; this includes DEX liquidity that has now been removed from SushiSwap and Uniswap. A small amount of liquidity on SushiSwap Arbitrum has been left to enable a minimum amount of NPM trading.
The protocol will be open sourced, and become a true public good. Enabling the community to fork the code developed by the Neptune Mutual team such that others might use the existing resources to further our mission to make the blockchain space better protected against smart contracts and other risks.
There are numerous factors that have led to this difficult decision, some of which are external factors which are uncontrollable or unforeseeable. A few factors summarized below:
“Given Neptune Mutual’s Tier 1 backers, why have you not listed on a top CEX?”
This is perhaps one of the most frequently asked questions. In short, the answer is that for a variety of reasons Neptune Mutual was not able to achieve the diverse set of performance metrics (community size and engagement, marketplace user activity, DEX 24 hour trading volume, TVL growth etc.) required to list on top tier CEX. The CEXs that are prepared to list NPM token do not have the depth of liquidity or breadth of user-base to offer good prospects for NPM tokenholders.
“Why has Neptune Mutual not achieved strong growth?”
It is tempting to take a shortcut to answer this question by pointing a finger at one specific factor, but the reality is that there are many contributing factors. A few summarized below:
Since the outset of engaging with the community we have endeavored to highlight the need for DeFiInsurance; Neptune Mutual built a comprehensive dataset of on-chain hacks available, anywhere, and each week we highlight the many millions of dollars that are stolen as a result of smart contract hacks. Despite this, we have consistently been confronted by projects unwilling to spin up cover pools in our marketplace because of the sentiment that audits of their code are sufficient to persuade their community that their protocol is safe. Less than 0.3% of all digital assets are protected with some form of DeFiInsurance, and yet despite all the media reports of hacks, the conference discussions about the importance of governance or CEX proof-of-reserves, it continues to be the case that it is extremely difficult to get media attention to focus on the need for a fast and efficient means of mitigating smart contract risk.
A variety of approaches have been taken by different DeFiInsurance protocols to address this, from attending multiple conferences throughout the year and significant marketing spend, to the leaner approach that Neptune Mutual took (in part as a result of the bear market in 2023). What can be said is that no DeFiInsurance protocol has managed to achieve significant growth over the last 18 months, sadly the overall TVL of the sector has shrunk a lot.
For all the reasons above, at this moment the best course of action is no longer to double-down on investing in growth, but rather to refund unused capital and close the marketplaces.
The consequences are very tough for the Neptune Mutual team who have spent the past 3 years of their time on the mission to facilitate safer environments within DeFi. The team has delivered products according to the roadmap and the fact that the protocol was never hacked, despite attempts being made on the darkweb, is testament to the expertise, passion and absolute focus on security. The team survived the FTX and UST crisis unscathed, and believed that the continued growth in hacks would lead to growth in the demand for a good solution to mitigate these risks, but sadly, as can be seen right across the DeFiInsurance category, this is not yet in sight. So we would like to thank the team for all the dedication, skill and passion invested into the Neptune Mutual project since the outset.
The team will open source the protocol, including blockchain indexing protocol (subgraph alternative), frontend, middleware, database, and backend code, to make it a true public good. This will allow anyone to fork the code and create covers by defining parameters and premium ranges, potentially leading to innovative covers and organic usage.
The Discord channel will be closed to reduce the risk of phishing and other types of cyber attack, any questions / queries will be responded to in the Telegram channel.
We want to take this final opportunity to thank you all for your support.
Neptune Mutual will contact only its financial backers, with whom a signed agreement exists, in relation to next steps (i.e. holding NPM tokens does not qualify you for any form of refund). Contact will be made only from a neptunemutual.com domain email address so please check the source of any email you may receive very carefully. Please ignore any messages from any other email or social media accounts in relation to token/cash refunds.
The root cause of the vulnerability is due to the usage of two different accounting system which led to inconsistent calculation for adding and removing liquidity in contracts.
The exchange contract used a constant K value algorithm to add liquidity; however, to remove liquidity, it calculates the tokens to return using the token-balance in the current pool and reduces the internal accounting reserves.
Elastic Swap Smart Contract Screenshot, Courtesy of Etherscan.
Step 3:
Due to such design, the attacker first added liquidity, before transferring some $USDC.e directly to TIC-USDC pool.
Step 4:
The amount of $USDC.e to be transferred to the attacker is multiplied by the number of LP tokens, then the attacker removed this liquidity to make a profit.
Step 5:
This attacker made a profit of approximately 22,454 $AVAX worth $290,328, and subsequently transferred them to another address.
Elastic Swap Hacker Transaction Screenshot. Courtesy of Snowtrace.
Step 6:
The AMPL-USDC pool of ElasticSwap on Ethereum was also compromised using the same method.
Step 7:
The attack was front run by a MEV bot, and the attack transaction carried out by the exploiter can be viewed here.
Step 8:
The attacker made a profit of roughly 445 $ETH worth around $564,000, which remains in the attacker's account.
The team published a Tweet stating that they have been compromised, and have asked users to remove their liquidity.
The attack also caused the project's TIC token to drop by more than 77% of its value, and was found to be trading at $1.05 at the time of this writing.
In order to prevent such attacks, it is of paramount importance to rigorously assess potential attack vectors and ensure the security of smart contracts before deployment. This includes conducting comprehensive audits or subjecting contracts to stringent tests within simulated environments to identify potential vulnerabilities.
The impact of this attack could have been notably mitigated had Elastic Swap been equipped with a dedicated cover pool within the Neptune Mutual marketplace. While standard terms and conditions already offer coverage for a range of DeFi attacks, including smart contract vulnerabilities, exceptions can be made in certain cases.
Users who purchase our parametric cover policies are exempt from the need to furnish loss evidence to access payouts. Payouts can be swiftly claimed once an incident is resolved through the governance system.
Moreover, recognizing that smart contract audits alone may not suffice due to the diverse range of attack vectors, Neptune Mutual's security team extends its assessment to encompass various domains, including DNS and web-based security, smart contract evaluations, and both frontend and backend security.
In conclusion, the Elastic Swap exploit emphasizes the significance of proactive security measures within the DeFi landscape. Neptune Mutual emerges as a vital ally in this endeavor, offering a means to curtail the impact of such vulnerabilities and providing a pathway to enhanced security and recovery.
