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Harmony can inflate the native token pool to compensate exploit victims. The proposal is controversial and has unsettled many in the community. However, without some sort of redress, 65,000 wallets will go empty handed.

This comes amid news that they suffered a $100 million hack in June.

$100 million stolen in Horizon hack

In June, Horizon (the Harmony Bridge) suffered from an exploit that stole $100 million after too many of the multi-sig wallets that manage the bridge were compromised.

The multi-sig wallet had five keys and required only two signatures for funds to be moved. This meant that once two different controlling wallets were compromised, the funds could be stolen.

When two out of five keys on a multi-sig wallet are compromised, there is always speculation that the exploit was the result of insider action.

The hack was an absolute disaster for Harmony. Not only did it show how vulnerable niche layers can be to centralization vectors (especially if they aren’t tried and tested) and how detrimental to the team’s reputation at Harmony, it was detrimental to all dApps as well did Start on Harmony. When liquidity dries up quickly due to exogenous shocks, risky assets suffer.

Resulting drop in ONE price – the multiplier effect

As a result of the hack, ONE’s price plummeted – it has fallen far more than many other layers during the bear market so far.

ONE token price has already had a volatile ride. ONE rose from a low of $0.0013 in March 2020 to an all-time high of $0.40 in October 2021 (more than 300 times from low to high).

Currently, ONE’s price has dropped back down to just $0.02. The falling token price has caused a whole host of problems for Harmony. Even without the hack that lost $100 million, Harmony struggled to find dApps to launch on her blockchain. Unlike competitors like Polygon and Avalanche, the Harmony dApp ecosystem is not very developed.

Additionally, the Harmony Grants Foundation awarded its grants in ONE rather than stablecoins. This meant that many of the tokens backed by the Harmony Foundation ended up with far less funding for development than they originally anticipated, and the Foundation itself is now unable to make such large investments in incubating its community .

The plan to mint more ONE tokens

The $100 million lost from the hack was made up of tens of thousands of user assets. Harmony made many attempts to undo the hack. Specifically, Harmony’s team attempted to work with law enforcement to recover the stolen funds, but to no avail.

The proposal to mint a billion new ONE$ to compensate victims of the bridge hack was published in a blog entry from the Harmony team. In the blog post, they explained that they are considering two approaches and that they are looking for community feedback.

The first possible course of action would involve an “estimated reimbursement of 100%”. If this option were chosen, 4.97 billion ONE would be minted over the course of three years.

The second option would be an “estimated 50% refund” where 2.48 billion ONE would be minted over a three year period.

Both approaches have been highly controversial, and community response to these proposals has been fairly mixed.

On the one hand, there is a general desire to compensate the victims of an exploit. Harmony does not want its reputation to be irreparably damaged and strives to find a solution that pleases its community.

Does a refund make sense?

However, all inflationary proposals have consequences, and the possibility of owning tokens that would be extremely diluted is not an attractive option. After all, the current circulating supply is just 12.3 billion, meaning compensating victims would require additional double-digit inflation over the next few years. In the case of the first proposal, monthly issuances of 138 million tokens would be required.

Harmony is unlikely to recover from this. Retaking their all-time highs would require roughly 20x price, which seems extraordinarily unlikely given the reputational damage suffered, the damaged stocks that will flow in the future when either of these proposals pass, and the strength of resistance.

It is extremely important for layer one blockchains to be as immutable as possible and not to make such drastic changes. Blockchains opting for these changes are drawing the ire of regulators for masquerading as securities functioning as networks, and this willingness to change is fostering an environment of uncertainty for investors.

Harmony should accept the loss and move on: redistributing funds to victims of the hack is worse for everyone and sets a bad precedent for the future immutability of the project.

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