Kinto Closure: A Cautionary Tale for DeFi

Ethereum Layer-2 project Kinto will close this month after a major exploit in July drained its reserves and left the team unable to secure new funding. The project’s demise serves as a stark reminder of the risks associated with DeFi and Layer-2 projects.

Exploit and Aftermath

On Sept. 7, Kinto announced on X that it will shut down operations on Sept. 30, following a July exploit that drained about 577 ETH (worth $1.9 million) and left the team unable to recover financially. The incident stemmed from a vulnerability in the ERC-1967 Proxy standard, a widely used OpenZeppelin codebase for upgradeable smart contracts.

Consequences of the Exploit

The exploit resulted in the minting of 110,000 fake Kinto tokens by attackers on Arbitrum, which were used to siphon funds from Uniswap liquidity pools and Morpho lending vaults. The project’s K token has slid 85% in the last 24 hours and is now 94% down in the past month. This volatility highlights the significant impact of security breaches on DeFi projects.

Fundraising Efforts and Debt

Through its “Phoenix Program,” Kinto raised $1 million in debt and resumed trading to stabilize operations. However, mounting debt, weak market conditions, and the loss of investor confidence proved insurmountable. Fundraising efforts have stalled, and team members have not been paid since July. The inability to secure new funding has ultimately led to the project’s closure.

Reimbursement and Next Steps

Kinto says it has consolidated around $800,000 of remaining assets into a foundation-controlled safe. These funds will go first to Phoenix lenders, who are expected to recover about 76% of their principal. Hack victims on Morpho will receive up to $1,100 each from a $55,000 goodwill grant funded personally by Kinto founder Ramon Recuero.

Recovery and Claim Process

Additional recoveries from the stolen Ethereum (ETH), if successful, will be returned to victims and then shared with the community through a Snapshot vote. Users have until Sept. 30 to withdraw assets from Kinto’s Layer-2. After that, a claim contract will be deployed on the Ethereum mainnet in October to allow users to recover balances. A scheduled ERA airdrop will still be distributed on Oct. 15.

Lessons Learned

Kinto’s closure is just one more example of the risks that Layer-2 and DeFi projects, particularly those that rely on upgradeable smart contracts, face. The exploit has fueled renewed calls for stricter security measures, better treasury protections, and sustainable yield models. As the DeFi landscape continues to evolve, projects must prioritize security and transparency to maintain user trust.

Responsible Shutdown

For Kinto, the end comes with an effort to repay what it can. “We’ll shut down responsibly, return what we can today, and keep fighting for recoveries tomorrow,” the team wrote on X. This approach demonstrates a commitment to accountability and user protection, even in the face of significant challenges. As the DeFi community moves forward, it is essential to learn from Kinto’s experience and prioritize responsible project management. You can stay up to date with the latest developments on bitpulse.