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

A recent exploit of the Kelp DAO and LayerZero bridge has put lending protocol Aave at risk of losing up to $230 million, with the final impact dependent on the resolution of the situation. According to a report by Aave Labs and LlamaRisk, the incident involves rsETH, a liquid restaking token issued by KelpDAO, which relies on a bridge mechanism to move tokens between blockchains. An attacker exploited this setup by forging a transfer message, resulting in the creation of new tokens without backing, and releasing 116,500 rsETH from the Ethereum-side bridge. The attacker then deposited 89,567 rsETH into Aave as collateral and borrowed approximately $190 million in ETH and related assets, exposing Aave to collateral with potentially impaired backing. Aave Labs quickly contained the risk by freezing rsETH markets, setting loan-to-value ratios to zero, and halting new borrowing against the asset. The outcome now depends on how Kelp handles the shortfall, with estimated losses ranging from $124 million if spread across all rsETH holders to $230 million if isolated to Layer 2 networks. The exploit highlights weaknesses in Kelp's cross-chain message verification process using LayerZero, allowing the attacker to extract value from the system. In response, users have withdrawn around $6 billion in total value locked from Aave, and discussions are underway to address potential losses, with the report stating that Aave's DAO treasury holds approximately $181 million in assets.