Reverse Rug Pull: Alchemix ‘Temporarily’ Increasing Fees to Cover $6.53 Million Shortfall in alETH Backing

The DeFi protocol suffered an incident due to an issue with the deployment script of the alETH vault. User funds are safe, and they can withdraw all of their ETH.


Decentralized finance (DeFi) protocol, Alchemix had an incident with its alETH contracts on Wednesday.

In response, the price of its token ALCX dropped 13% to about $457. As of writing, the $223 million token is trading around $500, down 32% in the last 7 days and 76% from its all-time high of $2,066 in March, as per Coingecko.

The DeFi protocol that allows for the creation of synthetic tokens that represent the future yield of a deposit enables users to retrieve tokenized value against temporary deposits of stablecoins.

Alchemix currently has $1.4 billion of total value locked (TVL) in it, up from $550 million last week, as per DeFi Llama.

Following the bug, the Alchemix team worked with the Yearn Finance (YFI) team to identify the error and assured that “funds are safe.”

Later in the day, an incident report was posted revealing that alETH backing currently has a shortfall of 2,688 ETH, $6.53 million.

As per the report, at around 12:30 AM UTC on June 16, some Alchemix alETH vault users found that they had no outstanding debt even though they previously borrowed alETH at a 4:1 collateral ratio.

Additionally, the debt ceiling of almost 2,000 ETH was freed up to mint new alETH again. In response, the team paused the minting of alETH temporarily.

The root cause of the incident was an issue with the deployment script of the alETH vault, which accidentally created additional vaults; the Alchemist then used the wrong index in the array of vaults which caused the outstanding rewards to be calculated wrong, forcing the transmuter funds to be sent entirely to pay off user debts.

In order to ensure that it doesn't happen again, the team is redeploying a new Transmuter that correctly deploys a single vault at index 0.

According to the team, individual users can withdraw all their ETH, and the loss is limited to the backing of alETH only.

The team is now temporarily increasing the protocol fee that will fill the $6.53 million gap, and this revenue will go directly to add backing to alETH tokens. Some of the ETH from the treasury will be added to the Transmuter to add instant backing to alETH, and some DAI from the treasury will be sold for DAI as well for the same.

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