Aave Faces Potential Losses of Up to $230 Million Following Kelp DAO Bridge Exploit

A recent exploit of the Kelp DAO and LayerZero bridge has put lending protocol Aave at risk of losses of up to $230 million. The incident revolves around rsETH, a liquid restaking token issued by KelpDAO, which relies on a bridge mechanism to move tokens between blockchains. An attacker manipulated this setup by creating a fake transfer message, resulting in the creation of new tokens without backing. The attacker then deposited these tokens into Aave as collateral and borrowed approximately $190 million in ETH and related assets. Aave has taken measures to mitigate the risk, including freezing rsETH markets and halting new borrowing. The outcome now depends on how Kelp DAO allocates the shortfall, with two possible scenarios: a 15% depegging of rsETH, resulting in approximately $124 million in bad debt for Aave, or a more severe impact of around $230 million in bad debt if losses are isolated to Layer 2 networks. The exploit has raised concerns about the security of interconnected DeFi infrastructure and has led to a significant withdrawal of total value locked from Aave.