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, contingent upon the resolution of the situation. According to a report published by Aave Labs and LlamaRisk on the Aave governance forum, the incident revolves around rsETH, a liquid restaking token issued by KelpDAO, which relies on a bridge mechanism to transfer tokens between blockchains. The attacker manipulated this setup by forging a transfer message, resulting in the creation of new tokens without backing, and releasing 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 swiftly contained the risk 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 potential 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 of cross-chain messages using LayerZero, allowing the attacker to extract value from the system. In response, users withdrew around $6 billion in total value locked from Aave, reflecting a broad pullback due to uncertainty.