Stakehound Accuses Fireblocks of Losing $74M of ETH

It’s a he said-she said scenario, and it’s about more than $74M in ETH.

Stakehound, a service which gives users a synthetic asset to trade for their staked Ether, has accused Fireblocks, a digital asset security firm, of losing 38,178 ETH.

The Ether, worth $74.4M at the time of writing, is staked in the ETH 2.0 deposit contract, but “may have been rendered inaccessible,” according to Stakehound. The staking service posits that “Fireblocks caused the loss of 2 keys that are part of the 3-of-4 threshold signature for the shards that form the withdrawal key.”

Fireblocks has countered saying that “the key shares created in connection with this project were managed outside of the Fireblocks platform and were not part of its MPC production wallet structure or backup procedures.”

Israeli High Court

MPC stands for multiparty computation, a cryptographic technique which allows entities to compute a function together, generating a group result without revealing individual inputs. By using the technology, Fireblocks creates an environment whereby “the private key is never concentrated on a single machine at any point in time.”

Stakehound also stated that “proceedings were issued out of Israeli High Court today.”

While the dust has yet to settle, what’s clear is the sheer magnitude of the lost funds ̶ the nearly 40,000 ETH represent over 5% of the total amount of ETH locked in liquid stake pools, according to a Dune Analytics dashboard. Before the keys were lost and with 8.8% of market share, Stakehound was the second largest provider of liquid derivatives tied to the amount of deposited and staked ETH.

SharedStake, another staking service which provides a derivative asset and holds 16,000 ETH, has also allegedly suffered a rug, with a rogue developer pulling vested tokens out of a timelock contract before the intended release date.

Staking Position

In total, ETH holders looking to stake but maintain liquidity have locked 717,497 of the digital asset in exchange for the synthetic assets representing the staking position.

This represents 12% of the total staked ETH. The other 88% is either staked independently or through services which don’t offer a derivative token like Stakehound does.

The lost Ether underscores the dangers of staking through a custodial service as opposed to individually and with a validator, or at least, with a non-custodial service. Custodial services hold users private keys and violate the crypto maxim, “not your keys, not your coins.”

Synthetic Asset

“While our staking services are completely non-custodial and we do believe this is the way forward, we would not want to discount all the functioning custodial products and services available,” a representative from Stakefish, another staking services provider told The Defiant.

Still, Stakefish doesn’t offer the derivative assets meant to allow people to double dip by staking and engage in DeFi by providing liquidity in pools like Curve Finance’s stETH pool. Stakefish mentioned other custodial companies like Kraken, Coinbase, and Binance which offer staking, but without issuing a pegged synthetic asset that enables double dipping.

The loss of Stakehound’s Ether meant to enable such opportunities make users think twice before trying to maintain liquidity while also earning staking rewards.

[ STORY WAS CORRECTED 6/24 @ 7pm EST TO REFLECT THE INCIDENT WAS NOT A HACK ON THE 7TH PARAGRAPH]