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 ultimate outcome dependent on the resolution of the situation. According to a report by Aave Labs and LlamaRisk, the incident revolves around rsETH, a liquid restaking token issued by KelpDAO, which relies on a bridge mechanism to transfer tokens between blockchains. An attacker manipulated this setup by forging a valid 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 has taken measures to contain the risk, including freezing rsETH markets and halting new borrowing. The outcome now depends on how Kelp handles the shortfall, with two possible scenarios: a 15% depegging of rsETH if losses are spread across all holders, resulting in around $124 million in bad debt for Aave, or a more severe impact if losses are isolated to Layer 2 networks, leading to roughly $230 million in bad debt. The exploit highlights weaknesses in Kelp's verification of cross-chain messages using LayerZero, allowing the attacker to extract value from the system. In response, users have withdrawn around $6 billion in total value locked from Aave, and discussions are underway to address potential losses, with Kelp's DAO treasury holding approximately $181 million in assets.