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Three lessons from the Audius hack


Audius, a decentralized music streaming platform powered by its token AUDIO, was in the news this week after a network attack. On July 23, Audius' staking, governance, and decentralization contracts were compromised after a hacker discovered a bug in the contract's initialization code, allowing the attacker to cast malicious voting proposals. 

The first (Proposal #84) attempted to falsify a delegation of 10 trillion AUDIO tokens to the staking contract (the actual AUDIO total supply is less than 1 billion tokens), while in the second proposal (Proposal #85) the attackers requested to transfer 18 million AUDIO tokens to their wallets. Using Proposition #84 as a test and executing Proposition #85, the attackers managed to circumvent the token governance vote in their favor using using a bug that allowed them to make the smart contract compute the 10 trillion AUDIO tokens as valid votes on their behalf, and finally transferring the 18 million AUDIO tokens from the community treasury to their personal account, which was later exchanged for 705 ETH through Uniswap (US$1.08 million).

In response to the attack, the Audius team used the same vulnerability to recover and interrupt system governance, token transfer, and other activities in the protocol's Ethereum contract. After fixing the bug and updating the contract, the protocol is now working normally.

There are three important lessons we believe can be taken from this attack:

  1. Smart contracts are not 100% immune to hacker attacks. There are several vulnerability points that can take years to be discovered, especially when it comes to code that interacts with the off-chain world (oracles, governance, etc).

  2. The speed with which the problem was solved calls into question the decentralized nature of some platforms. On the one hand, the Audius team’s response was good for preventing other attacks, but on the other hand it shows how centralized some protocols are that claim to be decentralized.

  3. For smaller protocols, a large token theft is not necessarily a good economic decision for the attacker. 18.5 million AUDIO tokens is approximately US$6 million. However, due to a lack of liquidity, the hacker was only able to exchange for US$1.08 million on Uniswap.

Crypto-related hacks and other fraudulent activity can generate a lot of media attention, which is why we believe it’s important to provide perspective on these activities and what investors can learn from them going forward. Despite events like the Audius hack, we believe Web3 applications remain an incredibly promising segment of the crypto ecosystem, as smart contracts reinvent the online economy and disrupt the large technology companies that currently dominate how we use the internet. 


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