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, pending the resolution of the situation. The incident, as outlined in a report by Aave Labs and LlamaRisk, centers on rsETH, a liquid restaking token issued by KelpDAO, which relies on a bridge mechanism to move tokens between blockchains. An attacker took advantage of this setup by creating a forged transfer message, resulting in the creation of new tokens without backing, and the release of 116,500 rsETH from the Ethereum-side bridge. Instead of selling the assets, the attacker deposited 89,567 rsETH into Aave as collateral and borrowed approximately $190 million in ETH and related assets. Aave swiftly 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 potential losses ranging from $124 million if spread across all rsETH holders to $230 million if isolated to Layer 2 networks. The exploit stemmed from 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 to the incident, users withdrew around $6 billion in total value locked from Aave, reflecting a broad pullback due to uncertainty. The episode highlights Aave's indirect exposure to external systems, resulting in increased collateral risk and pressure on lending positions. Discussions are underway with ecosystem participants to address potential losses, with Aave's DAO treasury holding approximately $181 million in assets.