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 losing up to $230 million, with the outcome contingent on the resolution of the situation. According to a report published by Aave Labs and LlamaRisk on the Aave governance forum, the incident centers on 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 forged transfer message that appeared valid, resulting in the creation of new tokens without backing and the release of 116,500 rsETH from the Ethereum-side bridge. Instead of selling the assets, the attacker used 89,567 rsETH as collateral to borrow approximately $190 million in ETH and related assets across Ethereum and Arbitrum, exposing Aave to potentially impaired collateral. Aave Labs acted swiftly to mitigate the risk by freezing rsETH markets, setting loan-to-value ratios to zero, and halting new borrowing against the asset. The outcome now depends largely on how Kelp handles the shortfall, with the estimated impact ranging from $124 million in bad debt if losses are spread across all rsETH holders to $230 million if losses are isolated to Layer 2 networks. The exploit was made possible by weaknesses in Kelp's verification of cross-chain messages using LayerZero, allowing the attacker to extract value from the system. In response to the incident, users withdrew around $6 billion in total value locked from Aave, reflecting a broad pullback due to uncertainty. The episode highlights the indirect exposure of Aave to external systems, with increased collateral risk, pressure on lending positions, and a decline in deposits. Discussions are underway with ecosystem participants to address potential losses, with the report stating that the DAO treasury holds approximately $181 million in assets.