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

A recent bridge exploit involving Kelp DAO and LayerZero has put lending protocol Aave at risk of losing as much as $230 million, contingent upon the resolution of the situation. According to a report published by Aave Labs and LlamaRisk on the Aave governance forum, the incident revolves around rsETH, a liquid restaking token issued by KelpDAO, which relies on a bridge mechanism to transfer tokens between blockchains. An attacker exploited this setup by creating a forged transfer message, 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 on the open market, the attacker used 89,567 rsETH as collateral to borrow approximately $190 million in ETH and related assets across Ethereum and Arbitrum, leaving Aave vulnerable to collateral with potentially impaired backing. In response, Aave Labs promptly contained the risk by freezing rsETH markets, setting loan-to-value ratios to zero, and halting new borrowing against the asset. The outcome now largely depends on how Kelp handles the shortfall, with two possible scenarios: if losses are spread across all rsETH holders, the token may face a 15% depegging, resulting in around $124 million in bad debt for Aave, or if losses are isolated to Layer 2 networks, the impact could be more severe, with bad debt rising to roughly $230 million. The exploit was made possible by weaknesses in Kelp's cross-chain message verification process using LayerZero, allowing the attacker to extract value from the system. The incident has raised concerns about the safety of interconnected DeFi infrastructure and the potential for undercollateralized loans, prompting users to withdraw around $6 billion in total value locked from Aave. The report notes that Aave's DAO treasury holds approximately $181 million in assets, and discussions are underway with ecosystem participants to address potential losses, with Kelp's plan for allocating losses still uncertain.