A devastating $292 million hack has shaken the cryptocurrency industry, revealing significant vulnerabilities in decentralized finance (DeFi) infrastructure and sparking fears of a ripple effect across lending protocols. The attack, which occurred over the weekend, appears to have targeted Kelp's rsETH token, a yield-bearing version of ether (ETH), and the mechanism used to transfer assets between blockchains. The perpetrator manipulated the system to create a large amount of unbacked tokens, which were then used as collateral to borrow and drain real assets from lending markets, primarily from Aave, the largest decentralized crypto lender. This incident is the latest setback for DeFi, coming just weeks after the $285 million exploit of Solana-based protocol Drift, further eroding investor confidence in the nearly $90 billion crypto sector.
The attack exploited a LayerZero bridge component, a critical piece of infrastructure that enables assets to move across different blockchains. According to Charles Guillemet, CTO of hardware wallet maker Ledger, the system relied on a single-signer setup, allowing a single entity to approve transactions. This setup enabled the attacker to mint a large amount of rsETH tokens without proper backing.
Once minted, the tokens were quickly deployed, with the attacker immediately depositing them in lending protocols, mostly Aave, to borrow real ETH against. This maneuver transformed the problem from a single exploit into a broader market issue, leaving DeFi lending platforms with collateral that may be difficult to unwind, while valuable and liquid assets are already drained. As a result, Aave and other lending protocols may be sitting on hundreds of millions of dollars in questionable collateral and bad debt, raising concerns of a potential 'bank run' dynamic as users rush to withdraw funds.
Aave saw a significant drop in assets on the protocol as users withdrew their assets following the incident, with the token associated with the protocol down by about 15% over the past 24 hours. Key questions remain unanswered, including how the validator was compromised and the attacker's identity.
The incident serves as a stark reminder that as DeFi grows more interconnected, failures in one layer can quickly cascade across the system. The exploit has also sparked concerns about the trustworthiness of DeFi protocols, with Guillemet warning that 2026 is likely to be the worst year for hacks in the sector.