In the aftermath of a $292 million exploit that left a significant gap in collateral backing, Aave and several prominent crypto firms have teamed up to launch a concerted recovery effort aimed at stabilizing decentralized finance (DeFi) markets. The initiative, dubbed 'DeFi United' and spearheaded by Aave service providers, seeks to restore the collateral backing of rsETH, a yield-bearing derivative token of ether (ETH) at the center of the exploit.
Aave has announced that multiple participants have already committed to supporting the effort, with staking provider Lido Finance and EtherFi being among the first to offer aid. Lido Labs Foundation, an ecosystem contributor to Lido Finance, has proposed allocating up to 2,500 stETH, valued at approximately $5.7 million, to a dedicated relief fund. The funds will be utilized to reduce the shortfall in rsETH backing and prevent forced liquidations across lending markets. This move was followed by EtherFi's proposal of a 5,000 ETH plan designed to 'protect users and prevent bad debt' across DeFi.
Aave founder Stani Kulechov has also pledged a 5,000 ETH contribution, stating that 'Aave is my life's work and we're working tirelessly to find the best possible outcome for users.' Aave plans to announce additional commitments once they are formalized. The 'DeFi United' initiative comes on the heels of the year's largest crypto exploit, which sent shockwaves through DeFi lending markets.
The incident was triggered by a vulnerability in KelpDAO's integration with LayerZero, which allowed an attacker to mint 116,500 unbacked rsETH tokens. Instead of selling the tokens, the attacker deposited nearly 90,000 rsETH into Aave as collateral, borrowing approximately $190 million in ETH and other assets across Ethereum and Arbitrum. This left Aave with impaired collateral, prompting a rush of deposit withdrawals and a $10 billion plunge in the total value of assets on the platform.
The estimated total shortfall stands at over 112,000 rsETH, according to Aave's incident report. Prior to the 'DeFi United' initiative, some early containment efforts had been made, including the freezing of 30,766 ETH, worth roughly $71 million, tied to the exploit by Arbitrum's security council.
However, the remaining stolen funds were bridged and swapped into bitcoin via Thorchain, complicating recovery efforts. The current initiative focuses on stabilizing the system through a coordinated bailout to recapitalize rsETH and mitigate losses, rather than attempting to recover the stolen funds.