Swell has paused deposits and withdrawals for its swETH and rswETH tokens after researchers warned that administrative and operational hot keys appeared compromised and that the tokens' exchange rates were being marked up without matching Ether backing.

The liquid staking protocol announced the pause on October 23, saying it is working with security partners, including Seal911, to secure its infrastructure and return net asset value (NAV) to the correct level, according to the protocol's official update.

The freeze followed a day of on-chain researcher warnings that unbacked rate markups had reached the on-chain maximum and that upgrade contracts capable of draining roughly 2,500 ETH had been staged, though not queued.

Researchers Flag Hot Keys and Staged Upgrades

On October 22, security researcher Spreek reported that admin keys for Swell DAO's swETH and rswETH appeared compromised, and that attackers were raising NAV by up to 1% per hour without backing. According to Spreek, four malicious upgrade contracts had been deployed but were not yet queued through the multisig, and those contracts could steal about 2,500 ETH. Spreek published a hot-key compromise incident write-up and cautioned that Claude had drafted parts of it, meaning some details remained unverified — though the top-line on-chain claims still appeared solid.

The report's timeline places the first anomalous activity at approximately 14:25 UTC on October 21, when the compromised oracle bot funded a deployer wallet. Later that day, gas was swept from dozens of Swell hot keys — internet-connected operational keys, as opposed to offline cold storage — across Ethereum, Arbitrum, HyperEVM, and Base into a central attacker wallet.

From 23:02 UTC, swETH and rswETH exchange rates began stepping up by 1% per hour — the contract maximum — with no matching ETH arriving alongside the increases. Example markup transactions include swETH at 23:02 and rswETH at 23:35. The write-up also said the bot redirected EigenLayer rewards claimers for dozens of rswETH StakerProxies toward the same wallet.

Four upgrade payloads targeting swEXIT, rswEXIT, and the deposit managers would have added a sweep path if ever installed. Payloads like these only take effect once they are queued through the multisig and a timelock delay elapses, which is why the staged-but-unqueued state mattered: the contracts existed on-chain but could not yet act. A link to the Railway platform was floated in the report as speculation only; Spreek said there was no hard proof and that it appeared to be a timing coincidence.

Swell's First Response, Then the Freeze

Hours the researcher posts, Swell said it was aware of suspicious activity on the swETH and rswETH contracts and was investigating with security partners. The team stressed that no ETH had left the swETH or rswETH withdrawal or deposit contracts, and that holders needed to take no action at that point.

The October 23 follow-up tightened the perimeter. Deposits and withdrawals for both tokens were paused, and Swell named Seal911 among its partners, saying all funds were safe. The protocol said resetting NAV to the correct value was the next step before reopening the deposit and withdrawal rails. Swell also warned users to treat phishing risk as elevated and to trust only official channels. The concrete milestones from here are the ones already on record: the NAV reset, the reopening of deposits and withdrawals, and — readable on-chain — whether the four staged upgrade payloads are removed and the affected keys are rotated.

Why the Pause Matters

The episode highlights that liquid staking token (LST) risk is not limited to smart contract exploits — it also comes down to who holds the keys that move the rate.

swETH and rswETH are liquid staking and restaking receipts. When an oracle bot can mark the exchange rate higher without new ETH behind it, secondary markets and lending venues that read getRate() inherit a distorted price. And when upgrade payloads sit ready for a timelock, the next failure mode is a privileged install, not a retail phishing lure.

Swell's freeze stops new deposits and exits while partners work to unwind the unbacked markup and rotate compromised keys. Rotating keys is the standard remediation for a hot-key compromise, since replacing the credentials is how the protocol revokes write access to the rate. That is containment language, and it is not the same as saying the attack surface never opened.

The sequence — a researcher thread first, then a “funds are safe” statement, then the pause — is a familiar one in protocol security incidents. Liquid staking technology keeps changing, but compromised hot keys remain capable of writing its next chapter.

Source: Live Bitcoin News