Incident Overview

The $9.6 million drain of the Resupply protocol (built on Morpho) in June 2025 was caused by a sophisticated ERC-4626 "First-Donation" inflation attack [Source: https://www.tradingview.com/news/cointelegraph:f45f36378094b:0-stablecoin-protocol-resupply-loses-9-6m-to-price-manipulation-exploit/]. By manipulating the vault's share price through a direct donation, the attacker forced the protocol's internal math to round the borrow exchange rate to zero, effectively allowing them to borrow the entire pool's liquidity against nearly zero collateral [Source: https://mirror.xyz/0x521CB9b35514E9c8a8a929C890bf1489F63B2C84/ygJ1kh6satW9l_NDBM47V87CfaQbn2q0tWy_rtp76OI].

Incident Overview

The exploit targeted the Resupply protocol's crvUSD/reUSD markets on June 27, 2025 [Source: https://rekt.news/resupplyfi-rekt].

The Mechanics of the Drain

The attack relied on the way ERC-4626 vaults calculate the exchange rate between "shares" and "assets." Because the vault was either new or had very low liquidity, the attacker could manipulate the ratio to an extreme degree.

1. Flash Loan & Setup: The attacker initiated a flash loan for $4,000 USDC, which was converted into 4,000 crvUSD [Source: https://mirror.xyz/0x521CB9b35514E9c8a8a929C890bf1489F63B2C84/ygJ1kh6satW9l_NDBM47V87CfaQbn2q0tWy_rtp76OI].
2. Direct Donation: Instead of depositing normally, the attacker "donated" 2,000 crvUSD directly to the vault contract address. This increased the vault's total assets without increasing the total supply of shares [Source: https://quillaudits.medium.com/resupply-hack-how-a-donation-attack-led-to-9-5m-in-losses-91e4e34d3bf5].
3. Minting 1 Wei: The attacker then deposited a tiny amount (2 crvUSD) to mint exactly 1 wei of shares. Because of the previous donation, that single wei of shares now "represented" the value of the entire donated amount [Source: https://www.quantumloom.in/blog/resupplyfi-vault-exploit].
4. Rounding to Zero: When the attacker attempted to borrow against this position, the protocol's integer division for the exchange rate calculation rounded down to zero. This made the protocol believe the debt had no cost or the collateral had infinite value [Source: https://x.com/OAK_Res/status/2036401600260972870].
5. The Drain: With the exchange rate broken, the attacker borrowed 10 million reUSD (the pool's maximum limit), effectively emptying the liquidity pool instantly [Source: https://mirror.xyz/0x521CB9b35514E9c8a8a929C890bf1489F63B2C84/ygJ1kh6satW9l_NDBM47V87CfaQbn2q0tWy_rtp76OI].

Root Cause: Inflation Vulnerability

The root cause was a lack of initial liquidity protection in Morpho Vaults V1 (versions 1.0 and 1.1) [Source: https://mirror.xyz/0x521CB9b35514E9c8a8a929C890bf1489F63B2C84/ygJ1kh6satW9l_NDBM47V87CfaQbn2q0tWy_rtp76OI].

Standard ERC-4626 implementations are susceptible to "inflation attacks" if they do not require a minimum amount of "dead shares" to be burned upon creation. Without this buffer, the first depositor can manipulate the price-per-share to an astronomical level, causing subsequent calculations to fail due to precision loss (rounding to zero) [Source: https://mixbytes.io/blog/overview-of-the-inflation-attack].

Prevention Measures

To prevent this in the future, security researchers and Morpho have recommended:

• Burning Dead Shares: Protocols should deposit and "burn" at least 1e9 shares to the 0x000...dEaD address immediately upon vault creation to lock in a minimum liquidity floor [Source: https://medium.com/@regis-graptin/build-secure-erc-4626-vaults-mastering-inflation-attack-prevention-64169912f188].
• Timelocks: Implementing a 3-day timelock for adding new markets to a vault to allow for security audits of the specific market parameters [Source: https://mirror.xyz/0x521CB9b35514E9c8a8a929C890bf1489F63B2C84/ygJ1kh6satW9l_NDBM47V87CfaQbn2q0tWy_rtp76OI].

Would you like me to perform a risk assessment on any other Morpho-based vaults you are currently using?