# The Dangers of Modern Vault Design: What Summer Finance/Block Analitica's $6m Loss Teaches Us *Pay attention to why this happened, not only the how. This is a cautionary tale on common vault patterns today and why they will continue to lead to a higher risk of these exploits over time.* By [Herd Labs](https://paragraph.com/@herd-labs) ยท 2026-07-08 --- I initially skipped over the Summer Finance hack since I thought it was a code or math bug - but then a few odd patterns caught my eye: * All reports I saw implied this was a very simple exploit with an "accounting bug" - I knew this protocol team was reputable as they had previously worked with Maker/Sky, so there should be no simple exploits. * The hack traces centered around a few tokens that had nothing to do with the protocol itself - not some weird synthetic/tranche/vault issuance bug. How was this token identified by the attacker but no one else? * There was not enough idle liquidity initially in the vault for the attacker to withdraw $6m but they somehow got around that. Vault withdraw-able liquidity is often managed by the curator, not the depositor. * The profit came from two vaults, not just one. No explanation I saw covered clearly why the second vault was impacted. It became quickly clear to me that there was no bug in the contracts and no operator keys phished - the losses were due to vault design working exactly as intended. Vault contracts are simple on their own, given the ERC4626 standard. But their natural growth over time leads to compounding price and liquidity risk exposures (and code/operations issues) that when manipulated together can cause large losses. And the build up of these risks is not a 0-day or a sudden upgrade/change, it comes over months and years of managing positions and evolving protocol patterns. All of today's vault face the same risks, that will only get worse as tokens and markets get more complex. So, it's important for us to collectively understand why and how this exploit happened. > _All this analysis is performed with Herd, using our_ [_DoubleClick and MCP/CLI products_](https://herd.eco/)_._ > > _You can find the full technical report with addresses/transactions linked_ [_in the agent forum post_](https://herd.eco/doubleclick/forum/019f426e-a452-7000-9770-f21cca833567)_._ > > _If you want visibility into all branches of your vaults and portfolios, with an agent to help you research and monitor positions - then reach out on_ [_twitter_](https://x.com/andrewhong5297)_,_ [_telegram_](https://t.me/andrewhong5297)_, or at_ [_andrew@herd.eco_](mailto:andrew@herd.eco)_._ Part 1: The Stowaway in the Ark =============================== To set the stage, the two vaults in question were launched on Summer Finance by the risk curator **Block Analitica** [in Feb/May 2025](https://forum.summer.fi/t/lazy-summer-protocol-risk-curator-announcement/77). Curators are the ones who manage all strategies and positions in these vaults. * **Lower LVUSDC:** a "lower" risk vault that had $9.68m TVL pre-exploit * **Higher LVUSDC:** a "higher" risk vault that had $482k TVL pre-exploit. This is not a risk tranche situation, these are two different vaults. Both vaults have been live for a little over a year at this point. All positions in the vault are managed in "ark" contracts which are individual solidity contracts for transferring and accounting (pricing) specific assets - be it a Morpho, Silo, or Gearbox vault or just plain USDC. This is a very common vault pattern typically called an "adapter". Across both vaults, there are sixty-seven arks set. Many of these are also vaults, which then have their own branching allocations depending on the protocol. If we traverse across all of the child branches of the sixty-seven different arcs the two vaults allocate to, **we'll find** **over 500 different underlying positions**. Many of these child branches have correlated allocations as well, like 12 different arks allocating to the same WBTC/USDC market on Morpho. Block Analitica put out a [post after the exploit](https://forum.summer.fi/t/lazy-summer-protocol-exploit-july-6-2026-ba-labs-risk-curator-retrospective/856) explaining that they were never responsible for removing arks because it's a governance role that they don't have. While technically true, this is a common risk from The balance sheet graph is a tangled mess that is barely legible in Herd. Those two big nodes on the right-middle side are the LVUSDC lower and higher vaults. To the left of them, we have all of the arks and then all of their subpositions. To the right, we have the holders of the vault share tokens. ![](https://storage.googleapis.com/papyrus_images/568c87f8356a8cb2aff3f334adc5f3d4283b7fd534be99354433c65108ab0d69.png) [Herd DoubleClick](https://herd.eco/doubleclick/tokens/graph/issuer/summer-finance?history=eyJpdGVtcyI6W1siZGlnIiwic3VtbWVyLWZpbmFuY2UiXV19) Hidden three levels deep within one ark under the lower vault in this graph is a Silo vault (vgUSDC) that is lending to a Silo market against nbxUSD-155 which is an xUSD wrapper. This is from stream finance, which [blew up in late 2025](https://thedefiant.io/news/defi/how-stream-finance-s-collapse-exposed-defi-s-looping-yield-bubble). No borrower is going to repay their loan to get their xUSD back since its valueless now, so this vault is effectively illiquid (no one can redeem for USDC since its lent out in Silo). However, because of the high interest rate that continues to accrue in the market the value of the original $32.8m allocated by Silo vault into the market becomes worth $488m. So vgUSDC depositors are rich! They just can never withdraw it. ![](https://storage.googleapis.com/papyrus_images/e2d205dce66bc3f28dbf34c6b8180bd10fb0146b472e12bb12a9e1ecc87f86f2.png) [The key "bad debt" token underlying vgUSDC](https://herd.eco/doubleclick/tokens/graph/issuer/summer-finance?history=eyJpdGVtcyI6W1siZGlnIiwic3VtbWVyLWZpbmFuY2UiXV19&panel=node&selectedNode=019f3c96-78b9-7000-a424-dd54c09a48e3) Naturally, vgUSDC holders are gonna wanna exit ASAP, and are forced to sell on a DEX instead. This creates a very imbalanced pool that then warps the exchange rate such that buying vgUSDC is very cheap compared to its actual net asset value of `totalAssets()/totalSupply()`. Five wallets swapped USDT for xUSD ($14.5k spent) and then swapped through the imbalance balancer pool for vgUSD valued at $7m (but again, totally illiquid). This was done between March 29, 2026 and April 9, 2026. ![](https://storage.googleapis.com/papyrus_images/346bcc4d37d6de979ce1adc3aba7274a1b0f7f432edc60e36e750cbe5de696b0.png) [The main balancer pool vgUSDC was acquired through](https://balancer.fi/pools/ethereum/pool/0xae255db04ba78519f33871c557d8fd6bafdb83bd) All this sleuthing work required knowing how to navigate a balance graph of vault dependencies, and finding a way to acquire an illiquid asset cheaply. The Block Analitica curator had added about 1-2 arks a month to the vaults over the last year, and never removed any arks. So even after the Stream Finance crash last year, they didn't realize that this exposure remained in an ark. The people at Block Analitica are very smart and have a long history in DeFi, so again this looks easy to spot now but only when its in a graph like this. If you are clicking through Etherscan/Debank or trying to write SQL queries you will very simply miss these dependencies. And remember, only the lower vault had exposure to vgUSDC. The higher vault is not allocated to that ark. With this context, we're ready to go through the actual exploit. Part 2: Attacking the Fleet =========================== First, a conceptual lesson for how the hack works. **I want to first emphasize that there was not a single bug in the Summer Finance code.** This was a donation hack - a method we've seen before [(1)](https://mudit.blog/cream-hack-analysis/) [(2)](https://www.zellic.io/blog/euler-finance-exploit-analysis/?utm_source=chatgpt.com), where some asset price is inflated by transferring tokens directly into a protocol instead of a normal deposit/mint. If pool A has 50 USDC and has 50 shares, then each share is worth $1. If I then transfer 50 USDC directly into the pool, the contract `totalAssets()` function will take balanceOf(USDC) and get 100 USDC and value each share at $2. A vault holds many different tokens, so if you knew one of them was about to worthless you could: 1. deposit to get shares at the current price 2. transfer your worthless token to the vault to increase the price 3. redeem your shares at the inflated price And that's exactly what the vgUSDC is for. The execution of steps is: 1. Obtain majority ownership of the vault shares 2. Transfer vgUSDC to the silo vault ark directly, inflating the totalAssets by $7m 3. Redeem your full ownership of the shares. Because you were a majority owner, you gain proportionally the most from the totalAssets inflation. Now, here comes the second problem for the attacker. The lower vault had only $1.6m of withdrawable liquidity. So even with the $7m of profit, you'd only make it out with that $1.6m - this isn't ideal. To get our answers, we have to look through [all the traces of the hack transaction](https://herd.eco/ethereum/tx/0x0db528c44f23fc7fa4544684a2fab81096450a14aae8bc89f42cd0592d43da12?isSimulated=false&history=eyJpdGVtcyI6W1sidCIsImV0aGVyZXVtIiwiMHgwZGI1MjhjNDRmMjNmYzdmYTQ1NDQ2ODRhMmZhYjgxMDk2NDUwYTE0YWFlOGJjODlmNDJjZDA1OTJkNDNkYTEyIl1dfQ) (everything below was done in one atomic tx). **Why the flashloan of $65m?** The lower vault had $9.6m in TVL. The $65m flashloan (one block loan) represents 86.4% of total shares when deposited, and if you then take the vgUSDC donation of $7.12m \* 86.4% you get $6.15m. This tells us exactly how much liquidity they thought they could get out. **How was the available liquidity increased?** Again, curators (Block Analitica in this case) are usually in full control of the available liquidity in their vaults. They will plan to have some percentage of the vault that is liquid so that depositors should have no trouble getting out. However, Morpho V2 Vaults added a special new function to give users more control over liquidity. This is the `forceDeallocate` function. This allows ANYONE to pay a fee in shares of the vault (set by the curators of that vault) to force liquidity from an adapter/market into idle liquidity. In the hack tx, we see the attacker depositing a minimal amount into the Morpho vaults that the lower vault arks are allocated to, and then calling `forceDeallocate` to move hundreds of thousands of dollars (sometimes millions) into idle liquidity as USDC. Some vaults don't have any fee set (like KPK prime) so they didn't even need to deposit to get shares. ![](https://storage.googleapis.com/papyrus_images/94980481d50f502c9c095b18b74dd0ba76263cb72f24d426c1832f351464b7a9.png) [See the "all transfer" button on the tx page](https://herd.eco/ethereum/tx/0x0db528c44f23fc7fa4544684a2fab81096450a14aae8bc89f42cd0592d43da12?isSimulated=false&history=eyJpdGVtcyI6W1sidCIsImV0aGVyZXVtIiwiMHgwZGI1MjhjNDRmMjNmYzdmYTQ1NDQ2ODRhMmZhYjgxMDk2NDUwYTE0YWFlOGJjODlmNDJjZDA1OTJkNDNkYTEyIl1dfQ) ![](https://storage.googleapis.com/papyrus_images/864562f92348181b2b384f8953ba2fc3a824457c6c64f25b170b08e7872977b4.png) This is not transferred to the attacker or the lower/higher vaults yet, but made available for immediate redemption in the Morpho vault itself, to be pulled through ark contracts when redeem is called. These are the four Morpho vaults deallocated from by the attacker, and their set penalties. These vaults did NOT face any bad debt or exploit, they just lost some liquidity. The penalties are a small cost to pay to then be able to withdraw this liquidity later. With that, the total withdrawable liquidity on the lower vault is ~$5.64m. The traces tell us they made $6.1m from the lower vault, so we're still short about $500k. Where did that last bit come from? There was one other ark token spotted in the traces. This was a tokenized strategy vault (tsvSummerfiUSDC), deposited into before the lower vault deposit. This strategy deposits into LVUSDC itself, so the $490k deposited here goes right back into the attackers pocket in the withdrawal, leaving only 21k shares of the lower vault in the attackers wallet. ![](https://storage.googleapis.com/papyrus_images/8c478cf6a007eb31824936acdaa5b472b44e836c4d20b6ac8012e7139af3cf89.png) This $490k nets out so their actual profit from the lower vault is **$5.64m**. **What about the higher vault, how was it exploited?** Well who holds the tsvSummerFiUSDC token? Its allocated to by an ERC4626ark held by the higher vault. So the higher vault actually IS allocated to the lower vault. ![](https://storage.googleapis.com/papyrus_images/bd242be65cbfeeae4a04736a7cd62ecf9860115b7218c0aa53261c5355fe8752.png) The recursive holding of the lower vault by the higher vault through the term ark If you've been following closely then you already know what's coming: 1. They deposited into the higher vault with some of the lower vault redeemed funds (much less since the TVL was already much smaller only $482k) 2. They transferred the tsvSummerfiUSDC into the higher vault, inflating the value through that ark (the ERC4626ark) 3. The fourth Morpho vault they deallocated from earlier provides the extra $283k of liquidity on top of the $116k of available liquidity 4. Redeem out for $399k profit That token's value also would have been inflated by the gain in lower vault's total assets, since the deposit came before the vgUSDC transfer to the ark. However this token contract's totalAssets must be manually updated by a keeper through a `report()` function, so it wasn't manipulated in this pass. With both these redemptions they can now repay the flashloans and the attack is over. **$6.1m in profit made (on $14.5k in xUSD costs).** Part 3: Rafting Back to Shore ============================= After the hack, the team paused all contracts and also [performed a sweep transaction](https://herd.eco/ethereum/tx/0x7bead580b8d610e56949fb4162384e6e31dec24ad3b4668d8f4bddc345f14fd4?isSimulated=false&history=eyJpdGVtcyI6W1sidCIsImV0aGVyZXVtIiwiMHg3YmVhZDU4MGI4ZDYxMGU1Njk0OWZiNDE2MjM4NGU2ZTMxZGVjMjRhZDNiNDY2OGQ4ZjRiZGRjMzQ1ZjE0ZmQ0Il1dfQ) to move all of the vgUSDC out of the ark - effectively crystalizing losses for depositors as bad debt. In this case, the majority of the exploit value hit only one large depositor who got into the vault with an initial deposit of $7.8m that is now worth $3.13m. The rest of the impact is partially taken by the higher vault and a couple hundred other very small depositors. Luckily, there were no other vaults wrapping these two. > Summer Finance has released their own postmortem with a higher level explanation of everything here [on their Twitter account](https://x.com/summerfinance_/status/2074522409869115468). Interestingly, in the sweep transaction this 3/5 safe was able to grant all the permissions necessary to arbitrary move funds all in one go, no timelock or anything: ![](https://storage.googleapis.com/papyrus_images/625b1faed63b01c48f1054081df8f8ebfda31fe5e71043784ea5c35ec49bd073.png) [Transaction Link](https://herd.eco/ethereum/tx/0x7bead580b8d610e56949fb4162384e6e31dec24ad3b4668d8f4bddc345f14fd4?isSimulated=false&history=eyJpdGVtcyI6W1sidCIsImV0aGVyZXVtIiwiMHg3YmVhZDU4MGI4ZDYxMGU1Njk0OWZiNDE2MjM4NGU2ZTMxZGVjMjRhZDNiNDY2OGQ4ZjRiZGRjMzQ1ZjE0ZmQ0Il1dfQ) This kind of permissioning ends up raising even more eyebrows, since most of the exploits we've seen this year have been due to hacked keys/safes. So, it's always important to understand the roles and permissions across contracts too. Here's part of the dependencies graph for the lower vault: ![](https://storage.googleapis.com/papyrus_images/c6a98ae60f5d4d70148b0b9b693356cd045a70c419d4aac2879ec874e28594f5.png) [Dependencies Graph](https://herd.eco/doubleclick/tokens/dependency/ethereum/0x98c49e13bf99d7cad8069faa2a370933ec9ecf17?history=eyJpdGVtcyI6W1siZGlnIiwic3VtbWVyLWZpbmFuY2UiXV19&panel=node&selectedNode=019f3b22-509a-7000-b7a1-35081e4e3e18) And this is just on the lower vault token contract itself. Think about all the child arks and those 500+ positions again - can you imagine then researching and monitoring all the deps on top of those, which can constantly change? Welcome to the new DeFi that we've created. The Biggest Risks for the Next Trillion Dollars of Vaults ========================================================= It's unfortunate to see great protocols/teams suffer losses, and it hits doubly hard when they already [faced bad debt on another vault](https://blog.summer.fi/arbitrum-usdc-vault-post-mortem-what-happened-and-what-comes-next/) due to Stream finance falling over last year. There are always multiple waves to exposure, the [pricing and delays/operations of markets during stress](https://paragraph.com/@herd-labs/the-strc-depeg-the-price-is-already-here-its-just-not-evenly-distributed) as well as follow on exposures which can take weeks to months to fully materialize (as we see here today). Our team has spent the last year analyzing the [full graph structures](https://paragraph.com/@herd-labs/measuring-defi-contagion-through-token-wrappers-and-protocols) of hundreds of different tokens and vaults, and there are four obvious patterns gaining traction that increase the risk of this happening again: * **Every token is now a vault:** We're seeing more and more "vault" wrapping "vault" like structures. [Looking at apxUSD](https://paragraph.com/@herd-labs/the-strc-depeg-the-price-is-already-here-its-just-not-evenly-distributed) is a good example of how many levels of wrappers you can end up with that all have different behaviors. There's always more yield to be had, with RWAs, risk tranches, interest rate mechanisms, etc. I just call these all "tokens" now because every token is just a vault. USDS is a vault. USDe is a vault. This sixty-seven ark type of structure is becoming more common. * **Pricing is not just a single oracle problem:** Vault accounting will continue to get more complex given layered wrappers. A lot of teams are still spending their times on oracles, but in most real depegs the oracles will go stale and are mismanaged. And then its up to the downstream accounting to see what fallbacks and other pricing options have been implemented where to keep the protocol/vault alive. * **More counterparties and timings are involved in todays tokens:** A lot of tokens now have async redemptions and queues, so accounting matters even during the time between requesting and claiming a redemption. Even more new attack vectors will come from this. * **Everyone wants instant liquidity facilities:** There are tons of teams working on liquidity facilities for different types of assets, providing backstops to markets/vaults. As we've seen with flashloans and now force deallocations - all instant liquidity is a potential exit vector for attackers. These risk patterns are only going to get worse over time as more assets and money come onchain. I would argue that these risks are no longer the "security" risks we've traditionally thought of but now proper financial and economic risks. The same that any large bank or fund would have to responsibly manage. I believe this is the next wave of risk management we are about to face as an industry - and it isn't just a code problem. But we are hiding all the complexity in the shadows, behind that cute one click button/number input that says "7% yields here!" Then pointing at curators when things go wrong. Vaults are gaining more and more mainstream distribution now with stablecoins and fintech deals, on protocols and platforms that do not want to take on the burden of assessing any of that risk. At a time when everyone is leaning into the chaos of complexity to chase more TVL, I believe all players need to recognize our responsibility to depositors and the industry at large. **I don't care if you are issuer, curator, allocator, protocol, or an app/aggregator - transparency is everyone's responsibility. Let's do better.** We should set the right reporting standards ourselves, before the SEC or anyone else does it for us. Especially if the risks are hard to continuously find even for the top curators in the space. > _Again, all analysis is performed using our_ [_DoubleClick and MCP/CLI products_](https://herd.eco/)_._ > > _I'm around if you want to chat, you can reach out on_ [_twitter_](https://x.com/andrewhong5297)_,_ [_telegram_](https://t.me/andrewhong5297)_, or at_ [_andrew@herd.eco_](mailto:andrew@herd.eco)_._ --- *Originally published on [Herd Labs](https://paragraph.com/@herd-labs/the-dangers-of-modern-vault-design-what-summer-financeblock-analiticas-dollar6m-loss-teaches-us)*