Ethereum Layer-2 Project Kinto Folds Following Exploit and Failed $1 Million Phoenix Recovery Attempt

Kinto Network Collapses After $1.55 Million Hack and Failed Recovery Efforts

Kinto Network’s governance token plunged more than 80% after the project confirmed it will cease operations on 30 September.

The Ethereum layer-2 protocol, built on Arbitrum, cited worsening market conditions, failed fundraising, and the aftermath of a July hack as reasons for closure.

The exploit drained 577 ETH, worth approximately $1.55 million, from a Morpho lending vault and a Uniswap v4 liquidity pool, triggering a near 95% drop in the token’s value.

Was the Hack Avoidable and How Did It Happen

The attack exploited a known vulnerability in the ERC-1967 Proxy standard, widely used in OpenZeppelin’s codebase.

Security researchers had publicly flagged the flaw, but the breach occurred mere hours after disclosure.

The attacker minted 110,000 counterfeit Kinto tokens on the Arbitrum-based layer-2 network and dumped them into liquidity pools, rapidly siphoning funds.

Phoenix Recovery Attempt Fails to Stabilise the Protocol

In response to the hack, Kinto launched the “Phoenix” initiative, attempting to raise $1 million to restore trading and DeFi operations.

The plan mapped new tokens to pre-hack balances and refilled liquidity pools.

While this provided partial relief, the recovery loans added debt that blocked further financing, leaving the project unable to sustain operations.

Founder Ramón Recuero Promises Partial Compensation to Victims

Founder Ramón Recuero, who previously led Babylon Finance through a $3.4 million hack, pledged a controlled shutdown and a limited restitution plan.

Ramon Recuero is a tech entrepreneur and founder known for creating the DeFi protocol Babylon.finance and for his time at Y Combinator.

Remaining foundation assets will be returned to “Phoenix” lenders, allowing them to recover roughly 76% of their principal.

Recuero personally contributed $55,000 to compensate victims of the Morpho lending vault hack, capped at $1,100 per affected address.

He stated:

“Every day that we go on, the funds dwindle further. We’ve operated without salaries since July, and after the last financing path fell through, we have one responsible choice left: shut down cleanly and protect users/lenders as best as possible. Plenty of teams vanish into ‘zombie mode’. We won’t. We’re doing this orderly and out in the open.”

High Yields and Ambitious Plans Could Not Save the Project

Kinto promoted itself as a modular exchange combining decentralised security with centralised efficiency and allowed trading of tokenised stocks like Apple, Microsoft, and Nvidia.

It offered staking returns of up to 130% APY in USDC, among the highest in DeFi, but critics pointed to these yields as unsustainable.

Operating without salaries since July and facing mounting losses, the team concluded that closure was the only viable option.

Users Urged to Withdraw Assets Before End of September

The team advised users to withdraw remaining funds by 30 September.

Any claims left after this date will be handled via a perpetual claim contract.

Kinto’s closure marks the second failed venture for Recuero, following Babylon Finance, highlighting ongoing risks in high-yield DeFi experiments.