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 losses of up to $230 million, depending on the resolution of the situation. The incident, detailed in a report by Aave Labs and LlamaRisk, centers on 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 forging a valid transfer message, resulting in the creation of new tokens without backing, and releasing 116,500 rsETH from the Ethereum-side bridge. Instead of selling the assets, the attacker deposited 89,567 rsETH into Aave as collateral and borrowed around $190 million in ETH and related assets, exposing Aave to potentially impaired collateral. Aave Labs quickly responded by freezing rsETH markets, setting loan-to-value ratios to zero, and halting new borrowing against the asset. The outcome now depends on how Kelp handles the shortfall, with two possible scenarios: if losses are spread across all rsETH holders, the token would face an estimated 15% depegging, resulting in around $124 million in bad debt for Aave, or if losses are isolated to Layer 2 networks, the impact would be more severe, with bad debt rising to roughly $230 million. The exploit stemmed from weaknesses in Kelp's verification of cross-chain messages using LayerZero, allowing the attacker to manipulate the process and extract value from the system. The incident has raised concerns about the safety of interconnected DeFi infrastructure and has led to a broad pullback, with around $6 billion in total value locked withdrawn from Aave. The report notes that Aave's DAO treasury holds approximately $181 million in assets, and discussions are underway to address potential losses, but Kelp has not yet outlined its plan to allocate losses, leaving Aave's ultimate exposure uncertain.