In the aftermath of a $292 million exploit, Aave and several prominent crypto firms have launched a collaborative recovery effort to shore up decentralized finance (DeFi) markets. The initiative, dubbed "DeFi United", aims to restore the collateral backing of rsETH, a yield-bearing ether (ETH) derivative token at the center of the hack. Aave has announced that multiple participants have already committed to supporting the effort, with staking provider Lido Finance being among the first to pledge aid. Lido Labs Foundation, an ecosystem contributor, has proposed allocating up to 2,500 stETH (worth approximately $5.7 million) to a dedicated relief fund.
The primary objective of the funds is to reduce the shortfall in rsETH backing and prevent forced liquidations across lending markets. This was followed by EtherFi's proposal of a 5,000 ETH plan to "safeguard users and prevent toxic debt" across DeFi. Aave's founder, Stani Kulechov, has also pledged 5,000 ETH, stating that "Aave is my life's work, and we're working tirelessly to achieve the best possible outcome for our users".
He expressed his commitment to resolving the issue and normalizing market conditions as soon as possible. Aave plans to announce additional commitments once they are formalized.
The DeFi United initiative comes in response to the year's largest crypto exploit, which has sent shockwaves through DeFi lending markets. The incident originated from a vulnerability in KelpDAO's integration with LayerZero, where an attacker exploited the bridge's messaging system to mint 116,500 unbacked rsETH tokens.
Rather than dumping the tokens, the attacker used nearly 90,000 rsETH as collateral to borrow approximately $190 million in ETH and other assets across Ethereum and Arbitrum. This left Aave with impaired collateral, triggering a rush of deposit withdrawals and a $10 billion decline in the platform's total asset value.
According to Aave's incident report, the total shortfall is estimated to be over 112,000 rsETH. Prior to the DeFi United initiative, there were some early attempts to contain the damage.
Arbitrum's security council froze 30,766 ETH (worth around $71 million at the time) linked to the exploit earlier this week. However, the remaining stolen funds were bridged and swapped into bitcoin via Thorchain, making recovery more complicated.
The current effort focuses on stabilizing the system through a coordinated bailout, aiming to recapitalize rsETH and mitigate losses rather than attempting to recover the stolen funds.