Today, about 12.3% of the BTC on Poloniex was stolen.

How Did It Happen?

The hacker found a vulnerability in the code that takes withdrawals. Here's what happens when you place a withdrawal:

1. Input validation.
2. Your balance is checked to see if you have enough funds.
3. If you do, your balance is deducted.
4. The withdrawal is inserted into the database.
5. The confirmation email is sent.
6. After you confirm the withdrawal, the withdrawal daemon picks it up and processes the withdrawal.

The hacker discovered that if you place several withdrawals all in practically the same instant, they will get processed at more or less the same time. This will result in a negative balance, but valid insertions into the database, which then get picked up by the withdrawal daemon.

What Did Poloniex Do Wrong?

The major problem here is that the auditing and security features were not explicitly looking for negative balances. They add deposits and withdrawals and check that accounts are in balance. If you have 2 BTC, withdraw 10 BTC, and are left with -8 BTC, the software would see that you deposited 2, withdrew 10, and have exactly what you should: -8.

Another design flaw is that withdrawals should be queued at every step of the way. This could not have happened if withdrawals requests were processed sequentially instead of simultaneously.

What Did Poloniex Do Right?

The existing security features noticed unusual withdrawal activity and froze BTC. That is how the activity was discovered.

What Happens Now?

I take full responsibility for this and am committed to repaying the debt of BTC. The exchange funds are 12.3% short. Because there is not enough BTC to cover everyone's balances, all balances will temporarily be deducted by 12.3%. Please understand that this is an absolute necessity--if I did not make this adjustment, people would most likely withdraw all their BTC as soon as possible in order to make sure they weren't left in that remaining 12.3%. Aside from the obvious drawback of most of the BTC being taken out of the exchange, this would not be fair--some people would get all of their money right away, and a few would get none right away.

The amount deducted from everyone's balances will be recorded, and funds raised from exchange fees, as well as donations from my own pocket (which is not very deep, I'm afraid), will be distributed regularly to all users who have had BTC deducted. Exchange fees will be raised to expedite the recovery of the debt. 1.5% has been suggested by many people, but I will take input on this.

If I had the money to cover the entire debt right now, I would cover it in a heartbeat. I simply don't, and I can't just pull it out of thin air.

Right now, all markets and withdrawals are still frozen, and they will remain that way until the negative balance watcher is written and in place and balance deductions are calculated. Please do not bother placing withdrawals right now, as they will not be processed and will probably all be cancelled before functionality resumes. ETA on availability of withdrawals is approximately 12 hours. I am afraid it is 3 AM where I am right now, and I think it is wise for me to get some rest before proceeding.

What Will Be Done to Prevent Further Exploits?

One thing has already been done: the withdrawal daemon now checks for negative balances before processing withdrawals and will freeze any account with a negative balance. This effectively prevents the exploit from being used again, but it is only a hotfix.

The next thing that will be done--before markets are unfrozen--is a daemon will be created that continually monitors for negative balances and freezes any account with a negative balance. After that, markets can be unfrozen and withdrawals resumed. Immediately following that, a daemon that will run automated audits on every account will be created, which will alert me of any strange activity and freeze any account with an overage of a balance.

After that, withdrawals and order creation will be switched to a queued method, where the first step will be to add the task to a global execution queue that will be processed sequentially.

-----

In conclusion...

I sincerely apologize for this, and I am very grateful to the many people who have already expressed their support and belief in my character. I take full responsibility; I will be donating some of my own money, and I will not be taking profit before the debt is paid.

I welcome your opinions on how to proceed, but please be constructive. I do not have the money to wave away the debt, so we'll need to work together.