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, as reported by Aave Labs and LlamaRisk, 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 creating a forged transfer message, resulting in the creation of new tokens without backing, with 116,500 rsETH released 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 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 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 was made possible by weaknesses in Kelp's cross-chain message verification process using LayerZero, allowing the attacker to extract value from the system. The 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raised concerns about the safety of interconnected DeFi infrastructure, with around $6 billion in total value locked withdrawn from Aave following the incident. Aave's report states that its DAO treasury holds approximately $181 million in assets, and discussions are underway with ecosystem participants to address potential losses, but Kelp has not yet outlined its plan for allocating losses, leaving Aave's ultimate exposure uncertain.