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, with the outcome dependent on how the situation is resolved. 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 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 across Ethereum and Arbitrum, exposing Aave to potentially impaired collateral. Aave Labs took swift action to mitigate the risk, freezing rsETH markets and halting new borrowing against the asset. The outcome now depends on how Kelp handles the shortfall, with estimated 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 extract value from the system. The incident has raised concerns about the safety of interconnected DeFi infrastructure and has led to a significant withdrawal of funds from Aave, with around $6 billion in total value locked being withdrawn following the incident.