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, with the final outcome contingent upon the resolution of the situation. According to a report published by Aave Labs and LlamaRisk on the Aave governance forum, 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 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 Labs promptly contained the risk 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 two possible scenarios: a 15% depegging of the token if losses are spread across all rsETH holders, resulting in roughly $124 million in bad debt for Aave, or a more severe impact if losses are isolated to Layer 2 networks, with bad debt rising to around $230 million. The exploit was made possible by 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 and the potential for undercollateralized loans, prompting users to withdraw around $6 billion in total value locked from Aave. The report notes that Aave's DAO treasury holds approximately $181 million in assets, and discussions are underway to address potential losses, with Kelp yet to outline its plan for allocating losses, leaving Aave's ultimate exposure uncertain.