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 outcome depending on how the situation is resolved. The incident revolves around 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 creating a forged transfer message, resulting in the creation of new tokens without backing. The attacker then deposited these tokens into Aave as collateral and borrowed approximately $190 million in ETH and related assets. Aave has since frozen rsETH markets and halted new borrowing against the asset to contain the risk. The outcome now depends on how Kelp handles the shortfall, with possible 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 process using LayerZero, allowing the attacker to extract value from the system. In response to the incident, users have withdrawn around $6 billion in total value locked from Aave, reflecting a broader pullback in the DeFi market.