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 centers on 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 releasing 116,500 rsETH from the Ethereum-side bridge. The attacker then deposited 89,567 rsETH into Aave as collateral and borrowed approximately $190 million in ETH and related assets, leaving Aave exposed to potentially impaired collateral. Aave Labs took swift action to contain 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 highlighted 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 has raised concerns about the safety of interconnected DeFi infrastructure and Aave's indirect exposure to external systems.