Alloyed BTC: Restore backing after the nBTC incident

Proposal Discussion
1

This proposal aims to restore the backing of Alloyed BTC on Osmosis by approving a future software upgrade to seize exploited assets from the attacker address, and by using Osmosis community pool BTC holdings to absorb the remaining unbacked nBTC, leaving Alloyed BTC users whole.

Background

On 25 June 2026 the Nomic bridge minted 40.650602 BTC of nBTC on Osmosis with no Bitcoin behind it — 25 identical IBC transfers in a single Nomic transaction (block 33137470, tx BEE54496B351A018D092779FE6C833238E1CDF965FE9761A572934F37932E028). The mint went undisclosed for 74 days; Nomic’s halt on 7 September prompted the check of Bitcoin backing that surfaced it.

39.839746 BTC of that counterfeit now sits inside the allBTC transmuter, where it is counted as collateral. Nomic’s entire Bitcoin reserve is 0.746 BTC, and its chain is halted, so none of the nBTC is redeemable.

allBTC today BTC
Shares outstanding 110.570944
Real collateral (WBTC, cbBTC) 70.731198
Unbacked nBTC counted as collateral 39.839746
Backing ratio 63.97%

The attacker did not move or sell 22.650608 allBTC which is now frozen by an emergency upgrade, v31.1.0, carried out by validators on the 7th September 2026

The remaining ~18 BTC was extracted from Osmosis and laundered through Tornado Cash. It is not directly recoverable, but we will be pursuing all available avenues to track and return these funds.

This results in a total shortfall of 39.84 BTC: 22.65 BTC is directly recoverable if governance chooses, and 17.19 BTC requires other intervention.

Proposed actions

1. Intercept the USDC.noble → allUSDC conversion liquidity

Cancel the pending liquidity re-deployment, freeing Community Pool owned BTC to fund the BTC re-peg. Estimated 7.75 BTC.

This covers the 4.7053 BTC residual gap identified in step 2, leaving roughly 3 BTC of the intercepted amount unused which will be redeployed into the wider liquidity position of the redeployment at 40,000 - 160,000 USDC.

2. Community pool spend of allBTC to the Liquidity subDAO

Fund the re-peg from the community pool to the Liquidity subDAO (osmo1rvq5cq2j35k7sqqz49e5e8zezl45fcywcawazh46qnc0g96d0d6sasqsgc).

  • Community pool holds 12.4838 allBTC (≈ $988,080)
  • Shortfall after the frozen shares are applied: 17.189137 BTC (≈ $1,360,503)
  • Residual gap: 4.7053 BTC (≈ $372,423), covered by the intercepted BTC from step 1

Spend only the amount needed for the re-peg. Unused funds, including the ~3 BTC of intercepted liquidity not required to close the gap, are re-deployed into the wide liquidity position planned in the USDC.noble → allUSDC conversion proposal.

This proposal carries out this spend directly.

3. Approve transfer of the exploiter’s allBTC to the Liquidity subDAO

Authorise moving the frozen 22.650608 allBTC at osmo1wq76r2mhqsa9yaygghuwyq4wy6dcsgf8vtzltn to the Liquidity subDAO for use in the re-peg. This covers 56.9% of the shortfall and is the only recoverable portion of the stolen funds.

This will require a software upgrade and is not directly executed by this proposal.

The freeze preserves the asset but does not allocate it; applying it to the shortfall is a governance decision, not an automatic consequence of v31.1.0.

This is a major decision: it reassigns a user’s balance by state change. The forensic record establishes the funds were obtained by exploiting a bridge accounting failure, and that the actor took deliberate steps to launder the proceeds.

4. Corrupt and withdraw nBTC, then burn it

Signal that

  1. nBTC should be marked as corrupted in the allBTC transmuter
  2. The liquidity subdao should withdraw the corrupted nBTC against the funds provided in steps 2–3
  3. Burn the withdrawn nBTC, making allBTC holders whole
  4. Once the balance reaches zero and nBTC has been removed from the alloy, restore allBTC deposit and withdrawal functionality on Osmosis.

This covers the 39.839746 BTC of nBTC inside the alloy. The 0.797700 BTC held outside it (1.96% of supply, ≈ $63,137) remains Nomic’s liability. Nomic’s remaining 0.746 BTC reserve is close to the size of this external float, though the chain is halted and no redemption is currently possible.

References

2 Likes
Migrate Protocol USDC to Alloyed USDC
2

While allBTC deposits and withdrawals are paused, is there a simple place where regular holders can check the current status and see whether they need to do anything? A clear notice in the app would also help prevent confusion and scams.

3

The Alloyed dashboard has just been updated to show if an asset is frozen/corrupted.

The existing tooltip on the frontend next to BTC has also been updated with the most recent information

2 Likes
4

Thanks, that should make the situation much clearer. Having the status visible in both the dashboard and the app is exactly what users need.

5

its a good strategy, but when can we expect for this to be implemented ??

1 Like
6

Hi, is there any news regarding this situation?

I’m sorry to ask. I completely understand the current situation, but I’m not sure what to expect going forward or what is planned for the future.

Thank you for your understanding.

7

The proposal has passed that allocates the Community pool funds to the liquidity subDAO to act on part of this.
A second proposal is needed to perform the chain upgrade to reclaim the remaining exploited allBTC, as this one only approved it in principle.
To be safe, we would like all funds to be in place before unfreezing the alloy to perform the restoration.

We’re aiming to bundle some security upgrades into this upgrade, and can’t give a solid timeline; however, we expect it to be completed by the end of October at the latest.

1 Like