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 of the situation. According to a report by Aave Labs and LlamaRisk, the incident involves 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 the release of 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 approximately $190 million in ETH and related assets. Aave Labs quickly contained the risk 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 potential losses ranging from $124 million if spread across all rsETH holders to $230 million if isolated to Layer 2 networks. The exploit was made possible by weaknesses in Kelp's verification of cross-chain messages using LayerZero, allowing the attacker to manipulate the process and extract value from the system. In response, users withdrew around $6 billion in total value locked from Aave, reflecting a broad pullback due to uncertainty. The incident highlights Aave's indirect exposure to external systems and the need for careful risk assessment in DeFi infrastructure.