WazirX implements ‘socialized loss strategy’ following $235m hack

Indian cryptocurrency exchange WazirX has announced a plan to mitigate the effects of the recent hack that led to losses of approximately $235 million.

The breach, which affected 45% of user funds, led the exchange to implement what it calls a “socialized churn strategy” in an effort to provide a fairer solution for its users and maintain platform stability.

WazirX’s July 27 blog post states that the firm plans to implement a 55/45 approach, where users will have instant access to 55% of their assets, while the remaining 45% will be locked in Tether (USDT)-equivalent tokens.

The exchange says its strategy aims to distribute losses fairly across all users and prevent any group from being disproportionately affected.

According to correspondence sent by WazirX to affected users (a copy of which was shared with crypto.news ), the exchange presented a questionnaire with two options for recovering the stolen funds. “Option A” would allow users to access 55% of their funds for “trading and depositing” without withdrawal rights, but would give them priority in potential recovery proceeds. “Option B” would allow users to withdraw 55% of their assets “in a gradual manner” but would have a lower priority in the recovery queue. In both cases, WazirX notes that the remaining 45% of user assets would remain locked on the exchange as “USDT-equivalent tokens” and would only be returned to users if the firm managed to recover the stolen funds.

Recovery options sent to affected users by WazirX | Source: crypto.news

In its post, the exchange requested affected users to vote for their preferred option by August 3, 2024.

According to survey results shared with the Crypto.news team, at the time of writing, around 62% of affected users chose Option B, which would allow them to make withdrawals. Another 38% decided against it and instead chose to forego immediate withdrawals in order to secure first priority for any potential recovery proceeds.

Survey results | Source: crypto.news team Background to the massive attack

The breach at WazirX resulted in a significant loss of approximately $235 million, making it the second most significant attack on a centralized exchange in recent memory. This incident was surpassed only by the DMM breach on May 31, which brought losses to $308 million.

Speaking to X today, the exchange’s co-founder Nischal Shetty reassured users about the exchange’s recovery and growth potential following the massive attack.

Specifically, Shetty outlined two historical responses to such crises: lengthy legal proceedings or the adoption of a socialized loss model combined with reconstruction efforts. He advocated the latter, emphasizing faster recovery through operational growth and profit sharing.

If WazirX can pull this off then nothing is impossible. If it grows and makes profits then these can be used for recovery.

But this is only possible now with the support of all our customers.

Historically, exchanges faced with such a situation had two options…

— Nischal (Shardeum) 🔼 (@NischalShetty) July 27, 2024

Shetty also called for a unified approach to overcome the platform’s challenges while emphasising the importance of community support, saying, “We can only achieve this together.”

Community review

Meanwhile, there is significant discontent among crypto users regarding WazirX and its co-founder, particularly regarding its socialized churn strategy. Many have called the approach a scam and questioned why the burden of the exchange’s difficulties should be placed on users.

Additionally, some affected users have expressed that they do not want the 45% of their affected assets that will remain locked to be converted to a stablecoin like USDT, preferring to keep them in the original cryptocurrencies instead.

Shetty acknowledged these concerns, arguing that maintaining a stable value in USDT is vital for effective planning of recovery strategies.

Shetty noted that the cost of cryptocurrencies fluctuates constantly, reaching lower values ​​in bear markets and higher values ​​in bull markets, so it is difficult to determine a consistent amount of recovery in volatile assets.

I understand you but this is not feasible or sustainable because the cost fluctuates every minute.

In a bear market the price will be low and in a bull market the price will be high.

To be able to organize recovery plans, a fixed value is helpful as it is the final amount that needs to be resolved… https://t.co/PqsElUjOBB

— Nischal (Shardeum) 🔼 (@NischalShetty) July 27, 2024

In 2023, cryptocurrency industry participants lost more than $1 billion in various attacks.