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 up to $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 issue revolves around rsETH, a liquid restaking token issued by KelpDAO. The protocol relies on a bridge mechanism to transfer rsETH between blockchains, which was exploited by an attacker who forged a valid transfer message. This resulted in the creation of new tokens without backing, with 116,500 rsETH released 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, leaving Aave vulnerable to collateral with potentially significant impairment. Aave Labs took swift action 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 largely depends on how Kelp handles the shortfall. If losses are spread across all rsETH holders, the token may experience an estimated 15% depegging, resulting in around $124 million in bad debt for Aave. However, if losses are isolated to Layer 2 networks, the impact could be more severe, with bad debt rising to roughly $230 million and concentrated on networks such as Arbitrum and Mantle. 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. The incident has raised concerns about the potential for undercollateralized loans and has led to a significant withdrawal of around $6 billion in total value locked from Aave. The episode highlights the indirect exposure of Aave to external systems, resulting in increased collateral risk, pressure on lending positions, and a sharp decline in deposits as users reassess the safety of interconnected DeFi infrastructure.