Recovery of Misappropriated Funds from Converter Contract Exploit and Allocation to Terra Classic Community Pool with 15% Finder’s Fee

Summary

This text proposal signals community support for the recovery of approximately 1,785.93 webETH
(equivalent to ETH on the Ethereum mainnet, valued at roughly $6.68 million at the time of transfer) that were
illegitimately extracted from the Terra Classic converter contract
(terra1emvfel8x7wmvkwjfq3jpa6sq4nsfjjqjm7ucnl) through an unauthorized migration and subsequent Wormhole bridge transfer.

Upon successful recovery, 15% of the funds will be allocated as a finder’s fee to the discoverers,
“$KNEEL Team 6,” who identified the exploit and will lead the decentralized recovery efforts. The remaining 85%
will be returned to the Terra Classic community pool to benefit the ecosystem.

The proposer, who assisted in drafting this proposal, will provide oversight to ensure transparency throughout the process.

Motivation

The Terra Classic converter contract facilitates the conversion and burning of bETH in exchange for releasing locked webETH, supporting the network’s bridging functionality.
However, a series of transactions exploited a vulnerability in the contract’s migration process, resulting in the unauthorized transfer
of significant assets out of the network.

This incident represents both a financial loss to the Terra Classic community and a breach of trust in the protocol’s security.
Recovering these funds would restore substantial value to the community pool and enable continued investment in the network’s growth.

Recovered assets can support essential activities such as:

• Core protocol development
• Node infrastructure maintenance
• Validator incentives
• Security audits
• Cross-chain interoperability enhancements
• Community-driven initiatives approved through governance

The 15% finder’s fee incentivizes decentralized discovery and resolution of such issues, aligning with blockchain principles of transparency and accountability.
The discoverer will conduct recovery operations without requesting any upfront funding, while the proposer ensures full community oversight
and reporting transparency.

Proposal Details

Background on the Exploit

The exploit occurred through the following sequence of transactions on Terra Classic:

• Store Code
  Transaction: 884DD10DF19B4D0A3B7F02A03644C88DFF9A86B0623D2A1EF60633ADEBD2DFDA
  Date: June 18, 2025 — Uploaded new contract code (ID 10150) containing a malicious migration handler
  capable of arbitrary state changes, including balance extraction.
• Authorization
  Transaction: 341A8FFEF05832CF9F03688F25254B56108915412D8339175F2AABC6ED2EBAAF
  Date: July 1, 2025 — Granted indefinite migration execution rights to the grantee address
  terra12jpf48ctwyfv05qr5q4knvvcua38vqq64ql4m8 on behalf of the converter contract owner.
• Migration
  Transaction: 6F32E7899E9F44AED86F3CD7D98FF5909F260FDCF9304E45F30968FF1A868AB9
  Date: July 2, 2025 — The grantee executed the migration to code ID 10150, triggering unauthorized transfer of
  1,786.02980355 webETH from the converter contract to the granter.
• Wormhole Transfer
  Transaction: 1A329188F31068BCEABA350D671823F5FBDEAF0C9BB900EAAEA2BCEEFC735EFC
  Date: July 2, 2025 — Initiated a Wormhole bridge transfer of 1,785.92980355 webETH to the Ethereum mainnet.
  The encoded recipient address decodes to 0x6b671b51258db0316dd89bc0075d6113488be5e8.
• Arrival on Ethereum Mainnet
  Transaction: 0x949600fc8bf2cbb6fae555f3e9cf1f9187d2e57eac12dcd302059f78727f3a25
  Date: July 2, 2025 — The bridged funds (1,785.615 ETH) were released to the same address, where they currently remain.

These transactions confirm an unauthorized extraction, inconsistent with the converter contract’s intended behavior.
Recovery will require blockchain forensic experts to decompile code, trace cross-chain flows, identify related addresses, and coordinate with exchanges and legal authorities
to locate, freeze, and reclaim the assets.

Proposed Action

• Recovery Process: The discoverer will lead decentralized recovery efforts in coordination with legal experts, blockchain forensics teams,
  and relevant authorities. No community pool funds will be used; all costs will be covered by the discoverer and deducted from the finder’s fee if recovery succeeds.
• Finder’s Fee: Upon successful recovery and return of funds to the community pool, the discoverer will receive 15% of the recovered amount
  as compensation.
• Return to Community Pool: The remaining 85% will be deposited into the community pool for governance-approved initiatives.
• Transparency: The discoverer will post regular updates on Terra Classic’s Discourse, Commonwealth, or X. If recovery is unsuccessful after reasonable effort
  (e.g., 12 months), no fee will be claimed.

This proposal is a text/signaling proposal since recovery involves off-chain actions on Ethereum; passage demonstrates community consensus and may strengthen legal or collaborative efforts.

Oversight

To ensure transparency and accountability, the proposer—who assisted in drafting this proposal—will serve as an oversight coordinator.

Responsibilities include:

• Monitoring the recovery process led by the discoverer
• Verifying regular public updates (monthly) on Terra Classic forums or X
• Reviewing reports and documentation
• Ensuring adherence to ethical and legal standards

The proposer will not handle funds or legal processes, serving solely as a community liaison to maintain transparency and trust.

Payment

Payment will occur only after successful recovery and verification that the recovered funds have been deposited into the Terra Classic community pool.

Upon completion:

• The discoverers (“$KNEEL Team 6”, wallet: terra1fnyfl8dmyudmn8qlcwmfwj3dfw9akh9gye287z) will receive 15% of the recovered amount as the finder’s fee.
• The remaining 85% will remain in the community pool.

All recovery-related costs are the responsibility of the discoverer. No upfront payments or community pool withdrawals will occur. All processes will be fully disclosed and documented.

Risks

• Recovery Uncertainty: Funds reside on a separate blockchain and may be inaccessible or controlled by unknown parties.
• Time and Costs: Recovery may take months and incur expenses, though these are borne by the discoverer.
• Market Volatility: ETH value may fluctuate before recovery is completed.
• No Precedent Guarantee: While similar recovery efforts have occurred within Terra Classic governance, outcomes are variable.

Timeline

• Proposal Passage: Immediate signaling upon approval.
• Recovery Initiation: Within 30 days of passage.
• Progress Updates: Monthly reports until resolution.
• Completion Target: Within 6–12 months, depending on complexity.

Conclusion

This proposal is a draft and open for community feedback to refine it into a final, actionable plan.

It addresses a critical exploit by enabling the recovery of lost community assets through a fair, incentivized, and transparent process.
Voting YES supports restoring value to the Terra Classic ecosystem, rewarding proactive security efforts, and upholding transparency and accountability.
Both the discoverer and proposer commit to maintaining ethical and legal compliance throughout the recovery process.

Join the Discussion

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