Arbitrum locks $71M in Ether due to Kelp exploit

So, on Monday, Arbitrum, which is an Ethereum layer-2 chain, decided to freeze over 30,000 Ether amounting to around $71.2 million. This was linked to the recent Kelp protocol hack. They mentioned that the security council, made up of 12 members elected by the Arbitrum community, took what they called "emergency action" to lock away 30,766 ETH from a wallet tied to the Kelp exploit. They also stated that this ETH has been transferred to a "frozen intermediary wallet" and the original wallet can’t access those funds anymore. Moving those funds will require another step from Arbitrum’s governance. For context, Kelp, a protocol for liquid restaking, suffered a hack of at least $293 million on Saturday via its LayerZero bridge. LayerZero even pointed fingers at North Korea for this attack. The fallout from this hack has dropped significant bad debt into the crypto lending space because the thieves used the stolen Kelp tokens to borrow other assets on Aave, a popular lending platform. Freezing crypto is a hot topic and divides opinions in the crypto world. Some believe it goes against the main idea of the technology, while others think it boosts security and keeps the network's integrity in check.

Maybe this can worth a new topic, but there is an ongoing discussion about the Kelp exploit on another thread on altcoins discussion board. OmegaStarScream posted about this Arbitrum freeze today on the thread and discussion there are still ongoing: https://bitcointalk.org/index.php?topic=5580683.msg66639620#msg66639620 The hackers has moved $175 million worth of the coin stolen after the exploit.

Arbitrum security council did a forced moves to the balance owned by hackers. This is pretty much the same like when circle or tether were forcing to blacklist/frozen your address. It means Arbitrum is already override their decentralization. So they're no longer decentralized anymore. FYI it needs at least 9 approval from security council members to take this protective action in order to secure its blockchain.

This is the part where the word decentralization suddenly gets very quiet in the room. I get why they did it, because if you can actually freeze a big chunk of stolen funds then from a damage-control perspective that is obviously better than just watching the attacker play hot potato across bridges for three days. But let's not dress it up as something it isn't. If a security council can intervene and freeze assets, then users should be honest with themselves that they're operating on a system with an emergency brake, not some unstoppable neutral machine. That may be acceptable to some people, but it is absolutely a trust assumption. What always amuses me is how these powers are treated like a conspiracy theory right up until the moment they're used, then suddenly everyone calls it "good governance." Fine, call it governance then. Just don't call it censorship-resistant in the same breath because that dog won't hunt.

Arbitrum has never been decentralised. About 10 years ago or so, emerging "web3 community" has drawn an equality sign between Bitcoin, Bitcoin-like networks and various Proof-of-Authority systems. ICO money has been invested into the destruction of fundamental principles on which blockchain technology was standing or was promising to stand.

Even Ethereum Mainnet was rolled back once, what's the big deal? I thought nobody had any illusions about alternative chains being any decentralised? Sure they can pretend and even ignore some hacks until there's a hack big enough. But decentralisation is not what we buy altcoins for, right?

The fact that many altcoin developers mentioned their blockchain to be decentralized blockchain. So it's what people bought. Tthey bought tokens that getting promoted by the developers. It mean sthey also bought the gimmick sold by the developers too. These days people are only aware a blockchain ran by several nodes = decentralized blockchain. Beside that i wanna to add more information if almost all of L2s have security council. So majority of L2 has never been decentralized. L2 is a blockchain that puts a back-door for its powerful member to rollback blockchain.

Arbitrum don't have ICO and it's got funded through rounds of funding including seed round, series A, and Series B. If a project is VC funded, it's almost guaranteed that they will be centralized to certain extent. Some enthusiast argue that the 9/12 multisig is decentralized because the council is voted by ARB holders, but compared to bitcoin, arbitrum is definitely centralized yes.

Back in the day, the Ethereum maximalists would ridicule blockchains like EOS and Tezos where developers would intervene to freeze stolen funds and revert malicious transactions. Over time, the altcoin ecosystem has become more comfortable with centralization. Tether alone now has a market cap greater than all the ERC-20 tokens without a blacklist function combined. When Balancer got hacked last year, several EVM based L1s and L2s decided to take the stolen funds away from the hackers. There are some idealists who still believe in cypherpunk principles, but for the most part, those days are long gone. The altcoin landscape of today is all about trusting centralized authority, where political resolutions to complex issues are preferable to allowing code to be law.

I think 95% or more Layer2s right now currently operate with centralized sequencers from the onset and it's why Arbitrum could freeze tokens on their later 2 network. I don't recall if any of the biggest layer2s have transitioned to decentralized sequencers. A lot of people don't read about how layer 2 networks operate and are acting surprised about how and why Arbitrum freezed the stolen fund. With centralized sequencers, the freezing is a feature, not a bug.

If the "security council" can freeze or cancel tokens, what is stopping it from secretly creating more of these tokens for the benefit of developers or blackmailing people to freeze their coins? It is a centralized L2 where it is subject to a council without any regulatory restrictions.

Sure it is centralised, however I doubt it's possible to create more of any of the tokens. If you mean ARB, the native token of the chain, it's possible to check whether the smart contract allows "minting" of more tokens. I personally don't think so but even if it does, it will instantly be visible on the blockchain and any unannounced mint would be treated by the market as a hack and the price of the token would plummet. Moreover, as a VC-backed startup, investors could sue them for diluting their stake if the terms and conditions of their deal did not mention such possibility. I don't see them as evil, they are just extractors, trying to ride the wave until their product is obsolete. One day no one will use it anymore and they very well know it.

Well, if it is centralised, then central authority effectively controls all supply no matter what. Does it really matter whether anyone can create tokens? In this situation, there is no true ownership, no true transactions and no true value transferring. Yes, they are extractors.