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, depending on the resolution. 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 exploited this setup by creating a forged 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 steps to contain the risk, including freezing rsETH markets and halting new borrowing. The outcome now depends on how Kelp DAO handles the shortfall, with possible losses ranging from $124 million to $230 million. The exploit was made possible by weaknesses in Kelp's verification of cross-chain messages using LayerZero, allowing the attacker to manipulate the system and extract value. The incident has raised concerns about the safety of interconnected DeFi infrastructure and has led to a significant withdrawal of total value locked from Aave.