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BTC Osmosis suspends Alloyed BTC related operations due to Nomic double payment vulnerability
Due to a security vulnerability in the Nomic protocol, an attacker made double payments of nBTC and injected unsupported credentials into Osmosis, Osmosis has suspended the deposit, withdrawal, casting and redemption functions of Alloyed BTC. The Nomic security failure affected 39.84 nBTC stored in Alloyed BTC, accounting for approximately 36% of the asset-backed reserves. The Osmosis and Cross-Chain Communications (IBC) protocols have not been affected, and the vulnerability is limited to Nomic's custom forwarding mechanism.
Emergency upgrade freezes 22.65 bitcoins
After discovering the anomaly, Osmosis's manager DAO stopped the inflow and outflow of funds from Nomic and Alloyed BTC, while the validator coordinated the execution of the emergency network upgrade, freezing 22.65 BTC at addresses controlled by the attacker. Existing Bitcoin liquidity pools can still be traded normally, but users are currently unable to create new Alloyed BTC or make redemption through regular support mechanisms. Previously, Osmosis had suspended operations of Alloyed BTC before releasing detailed details about the Nomic vulnerability.
Alloyed BTC (or allBTC) consolidates multiple bitcoin representations into a single Osmosis asset, including native WBTC, WBTC routed via Axelar, cbBTC, WBTC routed via Cosmos Hub, and Nomic's nBTC. Setting separate component limits is intended to limit the extent to which any single bridging agreement relies on alloyed assets. This mechanism is different from the theft of $24.15 million in AFX bridge funds in July, where a verifier signature authorized unauthorized USDC withdrawals; Nomic's failure allowed the same underlying value to support multiple nBTC requests, and the forged credentials were then entered into Osmosis through IBC.
Governance proposal may fill the remaining 17.19 BTC gap
Osmosis plans to propose to governance agencies to confiscate the frozen 22.65 BTC and use bitcoins already in community coffers to fill the remaining funding gap. Based on the 39.84 nBTC exposure determined by Osmosis, if the frozen amount is successfully recovered, approximately 17.19 BTC will still be needed for re-capitalization. The proposed combination would restore Alloyed BTC to full support before normal casting and redemption resumes.
This incident follows another failure involving a representative form of Bitcoin. Liquid Network recently successfully recovered 3400 BTC after nearly 4000 BTC left its federal reserve and unsupported L-BTC entered the authorized exchange route.
nBTC's risk exposure was originally planned to increase
Nomic's risk exposure attracts attention because Osmosis has been considering increasing nBTC's allowed share of Alloyed BTC. A governance discussion in July proposed increasing the static limit of nBTC from 35% to 60% after it reached about 33%. The proposal argued that Nomic's needs had exceeded the existing cap, but a community participant questioned the bridge's limited public development activities and specifically raised the risk of future compromise.
As of now, Osmosis has not restored the deposit, withdrawal, casting or redemption functions of Alloy BTC. The next step in recovery is a governance proposal that involves confiscating 22.65 frozen BTC and using Bitcoin in community vaults to restore the asset's supporting reserves.
