November 7, 2023

How We Rescued 32 ETH from a Compromised Staking Rewards Wallet

How We Rescued 32 ETH from a Compromised Staking Rewards Wallet

How We Rescued 32 ETH from a Compromised Staking Rewards Wallet

Recently, we found ourselves facing a unique challenge. One of our clients fell victim to a sophisticated phishing scam that not only stripped them of their Ethereum but also compromised their staking node's withdrawal wallet.

The stakes were high, as 32 ETH were in the validator and an additional ~3 ETH in rewards has been drained right after the Shapella upgrade already. This post chronicles our pursuit to recover these funds and shares invaluable lessons to prevent you from finding yourself in a similar bind.

A Blockchain Gamer's Nightmare

Our client, an avid blockchain gamer, was happily using his wallet both for gaming and receiving Ethereum staking rewards from his Node running a validator. However, trouble started brewing when a fraudster duped him on a Discord server for one of his favorite games.

The fraudster promised in-game rewards in exchange for a couple ETH. Our client, excited by the proposition, obliged and sent the Ethereum.

On realizing that he had been scammed, our client reached out to a Discord server moderator. The moderator saw this as an opportunity and tricked our client into revealing his seed phrase on a phishing website, under the pretext of helping him recover his lost Ethereum.

This is a major red flag in the crypto world! With the seed phrase in the wrong hands, the client's wallet was now compromised. Because the client used the same wallet for the receival of his staking rewards, all future rewards were now under threat.

An Ethereum Staking 101

For those unfamiliar with the concept, Ethereum shifted from a Proof-of-Work to a Proof-of-Stake model. Instead of miners creating blocks, validators process transactions and propose the blocks. These validators earn monetary rewards for securing the network, incentivizing the whole process.

Validators designate a withdrawal wallet for these rewards. Once set, this address is unchangeable. Approximately every 4 days, any Ethereum above the original 32 ETH stake is paid out to this wallet. It's important to note that these are balance state events and don't show up as transactions on Etherscan.

Exiting the validator node is a three-phase process. However, our main concern was that if the withdrawal wallet receives any rewards, they could be drained by the malicious actor.

Our Digital Detective Work

Armed with our client's wallet address, we established a monitoring script to alert us about any incoming and outgoing transactions as well as balance changes. We began investigating the fraudsters' wallets for signs of automation, smart contracts, Flashbots, and their connections with other wallets.

Using Arkham Intelligence, we mapped out the network of wallets connected to the compromised one. Our investigation revealed some good news: there were no signs of advanced fraudulent activities like automation or Flashbots. We also observed that the fraudsters weren't actively monitoring the compromised wallet, sometimes taking days to drain the received rewards.

Our workflow to crack this case.

Operation ETH Rescue

With these findings, we decided to launch a rescue operation to secure the client's 32 ETH before the fraudsters could.

Our plan involved setting up an automatic script that would transfer the entire Ethereum balance to a secure wallet once a specific threshold was reached. After rigorous testing, we initiated the three-phase exit process from the validator node.

It was a waiting game of almost four days, during which we continually monitored the associated wallets for any suspicious activity.

As soon as the 32 Ethereum were withdrawn, our alarm script sprang into action, transferring the funds to a secure wallet before the fraudsters could react. We successfully secured the client's 32 ETH and returned them, along with a detailed account of the entire operation.

Lessons from the Trenches: How to Protect Your Stake

Our client's harrowing experience provides valuable lessons for anyone dabbling in cryptocurrency and Ethereum staking. Here's what you can do to protect yourself:

Guard your seed phrase: Never ever share your seed phrase or private key with anyone, not even someone claiming to help you. This is the golden rule of crypto.

Segregate your wallets: Avoid using a wallet meant for specific purposes (like staking rewards) for other activities. Dedicate each wallet to a single purpose to mitigate risks.

Make use of MEV-Boost: Our client hadn't activated MEV-Boost for his validator, which left additional potential rewards on the table. Make sure to activate MEV-Boost manually to maximize your returns.

Being informed is the first step to securing your digital assets. Keep these tips in mind, and you'll be well-equipped to safeguard your cryptocurrencies.

Remember, we are here to help you navigate the complex world of crypto. If you find yourself in a similar situation or have any questions, don't hesitate to reach out to us.

Enjoyed this post? Share it with your network and let them know about our crypto-adventure. Let's make the crypto world safer, one user at a time!

Santino Wagner
Santino Wagner

Interested in Blockchain & Crypto, Financial Markets, Education and Compliance

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