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 Aave at risk of losing up to $230 million, with the outcome dependent on the resolution of the situation. According to a report published on the Aave governance forum by Aave Labs and LlamaRisk, the incident revolves around rsETH, a liquid restaking token issued by KelpDAO. The protocol relies on a bridge mechanism to transfer rsETH between blockchains, which was exploited by an attacker who forged a transfer message, resulting in the creation of new tokens without backing. The attacker then deposited the tokens into Aave as collateral and borrowed approximately $190 million in ETH and related assets, leaving Aave exposed to potentially impaired collateral. Aave Labs responded quickly 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: a 15% depegging of rsETH resulting in around $124 million in bad debt for Aave if losses are spread across all rsETH holders, or a more severe impact of roughly $230 million in bad debt if losses are 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. The incident has raised concerns about the safety of interconnected DeFi infrastructure, with users withdrawing around $6 billion in total value locked from Aave following the incident. The report notes that Aave's DAO treasury holds approximately $181 million in assets, and discussions are underway with ecosystem participants to address potential losses.