Jamie McNeill
Harmony may inflate the supply of their native token in order to reimburse exploit victims. The proposal is controversial, and has unsettled many in the community. Nevertheless, without some sort of reparation 65,000 wallets will be left empty-handed.
This comes in light of the news that in June they suffered a $100m hack.
$100m stolen in the Horizon hack
In June, Horizon (the Harmony bridge) suffered from an exploit in which $100m was stolen after too many of the multi sig wallet managing the bridge was compromised.
The multi sig wallet had five keys, and only required two signatures in order for funds to be moved. This meant that once two different controlling wallets had been compromised, the funds could be stolen.
When two of five keys on a multi sig wallet are compromised, there is always going to speculation that the exploit was the result of insider actions.
The hack was an absolute disaster for Harmony. Not only did it show how vulnerable more niche layer ones can be when it comes to vectors of centralisation (especially when they are not tried and tested) and damaging for the reputation of the team at Harmony, but it was also damaging for all the dApps that did launch on Harmony. When liquidity dries up quickly thanks to exogenous shocks, risk-on assets will suffer.
Resulting decline in ONE price – the multiplier effect
As a result of the hack, the price of ONE tumbled – it has fallen far further than many other layer ones during the bear market thus far.
The ONE token price has already been having a volatile ride. ONE rose from a low of $0.0013 in March of 2020 to an all time high of $0.40 in October of 2021 (more than 300x from trough to peak).
Currently the price of ONE is back down to just $0.02. The falling token price has caused a litany of problems at Harmony. Even without the hack in which $100m was lost, Harmony was struggling to find dApps to launch on their blockchain. Unlike competitors such as Polygon and Avalanche, the Harmony dApp ecosystem is not very developed.
Furthermore, the Harmony grants foundation was awarding their grants in ONE rather than in stablecoins. This meant that many of the tokens that the Harmony foundation supported have ended with far less funds for development than they originally anticipated, and and the foundation itself is now no longer capable of making such large investments into incubating its community.
The plan to mint more ONE tokens
The $100m lost in the hack was collectively made up of tens of thousands of users’ assets. Harmony made many attempts to make amends for the hack. Notably, the team at Harmony tried to cooperate with law enforcement in order to recover the stolen funds, but to no avail.
The proposal to mint one billion new $ONE in order to reimburse the victims of the bridge hack was floated in a blog post by the Harmony team. In the blog post, they detailed that there were two courses of action that they were considering, and explained that they were looking for community feedback.
The first potential course of action would involve “an estimated 100% reimbursement”. If this option were chosen, 4.97 billion ONE would be minted over the course of three years.
The second option would be “an estimated 50% reimbursement” in which 2.48 billion ONE would be minted over the course of a three year period.
Both approaches have been extremely controversial, and the community response to these proposals has been quite mixed.
On the one hand, there is a general desire to compensate those who were the victims of an exploit. Harmony don’t want their reputation to be irreparably damaged and are eager to find a resolution that pleases their community.
Is reimbursement a good idea?
However, all inflationary proposals come with consequences, and the possibility of owning tokens that would become extremely diluted is not an attractive possibility. After all, the current circulating supply stands at just 12.3 billion, meaning that compensating victims would require additional double digit inflation over the course of the next few years. In the case of the first proposal, it would require monthly emissions of 138m tokens.
It is unlikely that Harmony will recover from this. To reclaim their all time highs would require an approximate 20x in price, which seems extraordinarily improbable when one considers the incurred reputation damage, the damaged stock to flow going forward should either of these proposals past, and the strength of opposition.
It is extremely important for layer one blockchains that they should be as immutable as impossible, and shouldn’t make such drastic changes. Blockchains that choose to adopt these changes invite the ire of the regulatory bodies for exposing themselves as securities that operate as networks, and this liability to change fosters an environment of uncertainty for investors.
Harmony ought to accept the loss and move on: redistributing funds to victims of the hack is worse for everyone, and sets a bad precedent for the future immutability of the project.
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This article was written for Business 2 Community by Jamie McNeill.
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