Key Takeaways
- Hackers hitting Bybit in early March used ParaSwap to attack the exchange.
- While the attackers used ParaSwap to move stolen assets, the protocol’s on-chain transparency allowed Bybit to track transactions.
- The incident will likely fuel discussions on whether decentralized exchanges (DEXs) should implement stricter compliance measures.
The crypto world was rocked when Bybit suffered a $1.4 billion heist. Hackers manipulated a routine transfer to drain its cold wallet.
As the stolen funds vanished into DeFi, an unlikely ally emerged—ParaSwap. Unlike traditional finance, its on-chain transparency left a trail, sparking a race against time to track the attackers.
The Bybit Breach
The recent Bybit security breach exposed critical vulnerabilities in crypto exchanges, showing that even well-established platforms are not immune to sophisticated attacks.
The incident began when hackers manipulated a routine transfer from Bybit’s ETH cold wallet, altering the underlying smart contract logic while keeping the correct address visible on the signing interface.
This allowed the attackers to divert 499,000 ETH ($1.4 billion) to an unknown address.
Unlike previous hacks, where stolen funds often remained untouched for years, the Bybit attackers moved quickly.
They converted the stolen ETH into Bitcoin and used various privacy-focused tools, such as Wasabi, CryptoMixer, Railgun, and Tornado Cash, to obscure their tracks.
Bybit’s security team and blockchain forensic experts immediately launched an investigation, but the speed and complexity of the laundering tactics posed a major challenge.
ParaSwap’s Role in Tracking the Stolen Funds
As Bybit scrambled to trace the stolen assets, decentralized finance (DeFi) platforms became crucial to the story.
ParaSwap, a decentralized exchange (DEX) aggregator, was one of the protocols the hackers unknowingly used.
Since ParaSwap operates with full on-chain transparency, it can track every transaction, which allows for partial fund recovery.
Bybit submitted a proposal to the ParaSwap DAO , requesting the return of any fees the hackers paid while using the protocol. The DAO approved the request, allowing Bybit to recover 40 ETH in fees.
Although small compared to the overall theft, this amount demonstrated how DeFi’s transparency can help track illicit funds.
Mounir Benchemled, CEO of ParaSwap, highlighted how decentralized protocols remain neutral, simply executing transactions based on input data.
“The hackers who attacked Bybit used ParaSwap, a protocol with transparent on-chain records. In response, Bybit submitted a proposal to the ParaSwap DAO to reclaim the fees paid by the hackers , which was approved last week,” he told CCN.
However, he noted that frontend interfaces could implement additional security measures to restrict bad actors when more information is available.
The case showed that while DeFi operates without intermediaries, it is not lawless.
DeFi Security and the Future of Regulation
The Bybit hack reignited debates on DeFi security and regulation, especially after the FBI linked the attack to North Korea’s Lazarus Group.
DeFi protocols played a role in the laundering efforts, prompting regulators to push for stricter oversight. Some advocate for enforcing Know Your Customer (KYC) measures on DEXs to curb illicit activity, but Benchemled disagrees.
“DEXs are inherently neutral, decentralized protocols that execute transactions purely based on input data, without identifying the users behind them,” Benchemled said.
“However, client interfaces, such as frontends, can implement security measures to restrict bad actors when additional information is available,” he added.
The attack also demonstrated how security incidents drive innovation. As hackers develop more advanced laundering techniques, the industry must evolve with better monitoring, real-time analytics, and governance mechanisms.
Every major breach exposes vulnerabilities, prompting stronger security measures and pushing the industry toward more resilient systems.
For Benchemled, these events highlight vulnerabilities, “prompting teams to innovate and implement advanced security measures that enhance protection without compromising Web3’s core principles, including decentralization, transparency, and censorship resistance.”
“Over time, this iterative process strengthens the ecosystem, fostering greater trust, adoption, and long-term sustainability,“ he added.
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