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. 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 forging a 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. To mitigate the risk, Aave Labs froze rsETH markets, set loan-to-value ratios to zero, and halted new borrowing against the asset. The outcome now depends on how Kelp handles the shortfall. If losses are spread across all rsETH holders, Aave would face an estimated $124 million in bad debt. However, if losses are isolated to Layer 2 networks, the impact could be more severe, with bad debt rising to roughly $230 million. The incident has raised concerns about the safety of interconnected DeFi infrastructure and has led to a withdrawal of around $6 billion in total value locked from Aave. Discussions are underway to address potential losses, with Kelp's DAO treasury holding approximately $181 million in assets.