The second-largest regional hack costs Japanese crypto exchange DMM Bitcoin $305 million in losses.
TakeAway Points:
- Japan’s second-largest cryptocurrency exchange, DMM Bitcoin, lost $305 million (4,502.9 BTC) in a hack.
- While guaranteeing complete reimbursement for losses, the exchange has limited spot purchases and issued a warning about yen withdrawal delays.
- This event, which comes after Coincheck’s 58 billion yen theft in 2018, brings attention to the continued security issues facing the cryptocurrency industry.
DMM Bitcoin Hack
DMM Bitcoin, a well-known cryptocurrency exchange in Japan, has announced that it suffered a serious security breach that cost it 48 billion yen ($305 million). A blog post on the exchange’s website states that 4,502.9 BTC “leaked” out of the platform.
As a result of the hack, DMM Bitcoin has put in place safeguards to stop further unauthorised outflows, and it has guaranteed to its users that it will obtain the necessary amount of BTC to cover the loss—as long as its group companies support it—as well as restricting all spot buys on the platform and informing them that withdrawals in Japanese yen might take longer than normal.
The loss of 58 billion yen that Coincheck experienced in 2018 makes this incident the second-largest cryptocurrency hack in the area.
Inflows of Bitcoin Into Sidechains
Bitcoin worth billions of dollars is being invested in blockchain projects, which have a track record of security lapses. The ability to generate passive returns is something that these projects give Bitcoin owners, something that has historically been more typical of other cryptocurrencies. But the enthusiasm for these initiatives frequently outweighs the dangers involved. In contrast to the proof-of-work mechanism of the original Bitcoin blockchain, sidechains and bridges are used in these new initiatives to enable transaction processing.
According to Dragonfly managing partner Haseeb Qureshi, “you are trusting the sidechain bridge when you are depositing money into a sidechain.” Since the organisations in charge of these bridges determine their security, this creates counterparty risk.
In the past, some of the biggest cryptocurrency exploits have targeted sidechains and bridges. For example, in March 2022, hackers stole about $625 million from the Ronin sidechain for Axie Infinity, and the Wormhole bridge for Solana and other blockchains saw a $325 million heist in the same year.
Despite these dangers, initiatives such as Merlin Chain have drawn substantial Bitcoin inflows; as of Monday, according to Dune Analytics, over 11,642 Bitcoin worth over $800 million have been deposited to its network.
False Layer 2 Allegations
These projects’ developers frequently refer to them as layer 2 blockchains, implying that they are constructed on top of the Bitcoin network and take advantage of its security. The network of Bitcoin, however, is unable to validate transactions on other blockchains due to existing technological limitations.
These so-called layer 2 blockchains are therefore sidechains, which come with extra hazards. Bridges, which let users move Bitcoin to and from the main blockchain, are more centralised and open to abuse because they are frequently run by a number of businesses.
Merlin Chain, one of the most popular projects in this category, has been marketed as a layer 2 blockchain despite being a sidechain. Jeff Yin, founder of Merlin Chain, acknowledged this discrepancy, attributing it to a “branding language” issue.
“From day one, we’ve said this is a sidechain; we don’t need to ride the hype of layer 2,” Yin stated.
However, Merlin Chain’s website and technical page continue to promote it as a layer 2 blockchain. Yin argued that much of the criticism comes from the rival Ethereum community and that the debate over the term ‘layer 2’ has become more political than technical.
Institutional Engagement and Safety Protocols
Supporters contend that despite the dangers, initiatives like Merlin Chain have a lot to offer, including higher income and liquidity for Bitcoin owners. Yin stated that in an effort to improve security, institutional custodian firms have been collaborating with Merlin Chain and other significant Bitcoin initiatives. In order to guarantee the security of their platform, Merlin Chain alone has paid these service providers “millions of dollars.”
According to the report, the idea of encapsulating Bitcoin for application on alternative blockchains is not new. In January 2019, BitGo introduced Wrapped Bitcoin, which can be used on several blockchains, including Ethereum, and is backed 1-to-1 by Bitcoin held in custody. However, rival cryptocurrency ventures like US Treasuries are also posing a threat to Bitcoin by providing rewards and greater yields from comparatively safe real-world assets.
