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. The incident revolves around rsETH, a liquid restaking token issued by KelpDAO, which relies on a bridge mechanism to move tokens between blockchains. An attacker manipulated this setup by creating a forged 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 used 89,567 rsETH as collateral to borrow approximately $190 million in ETH and related assets across Ethereum and Arbitrum, leaving Aave exposed 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 largely 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 cross-chain message verification process using LayerZero, allowing the attacker to extract value from the system. This incident has raised concerns about the safety of interconnected DeFi infrastructure, with around $6 billion in total value locked withdrawn from Aave following the incident. The report highlights Aave's indirect exposure to external systems, with increased collateral risk, pressure on lending positions, and a decline in deposits. Discussions are underway with ecosystem participants to address potential losses, with Kelp's DAO treasury holding approximately $181 million in assets.