A shocking development has hit the DeFi world: Kinto, one of the Ethereum Layer 2 (L2) projects once praised for prioritizing KYC compliance, officially announced its shutdown on September 30, 2025. The decision came after a massive exploit last July that drained around $1.55 million from the protocol.

A Sophisticated Exploit Hits Kinto

On July 10, 2025, Kinto was attacked through a smart contract vulnerability. The attacker managed to mint 110,000 fake Kinto tokens on its Arbitrum-based L2 network and then sold them on the market. As a result, about 577 ETH worth $1.55 million was drained from Morpho lending vaults and Uniswap v4 liquidity pools.

The impact was immediate: Kinto’s token price plummeted 95%, leaving many investors with heavy losses within hours.

Ironically, this vulnerability had already been flagged by security researchers. However, Kinto was exploited just hours after the issue was disclosed, leaving the team without enough time to respond.

Attempting a Comeback with “Phoenix”

After the hack, Kinto tried to recover by launching the “Phoenix” program, which issued new $KINTO tokens to restore pre-hack ownership and partially refill liquidity. The team even managed to raise $1 million to restart operations.

Unfortunately, the new debt burden from recovery loans only worsened the protocol’s sustainability. Instead of bouncing back, Kinto struggled even more to secure additional funding.

Shutdown Announcement: Focus on Protecting Users

Kinto’s founder, Ramón Recuero (also the founder of Babylon Finance), ultimately announced that the protocol would be shut down in a “clean and transparent” way.

In his statement, Recuero emphasized:
“Many teams fade into zombie mode. We will not do that. We are shutting down orderly and protecting users as best as we can.”

According to the plan:

• Phoenix lenders will recover about 76% of their loan principal.
• Recuero will personally contribute $55,000 to cover Morpho victims’ losses, up to $1,100 per address.
• All remaining foundation assets will be allocated to reimburse users.

A Bitter Lesson for Layer 2

Kinto once stood out because it differed from other DeFi protocols: it offered a fully KYC-compliant DeFi ecosystem, making it attractive to institutional traders. However, the July exploit was a fatal blow they couldn’t recover from.

Kinto’s shutdown serves as a reminder that even protocols that appear safe and regulatory-friendly remain vulnerable to attacks in the crypto world.

Conclusion

With Kinto’s closure, DeFi has lost another potential player in the Ethereum Layer 2 space. Even so, the team’s decision to shut down transparently and compensate users is considered more honorable than letting the project become a “zombie project” with no direction.