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, depending on the resolution of the situation. The incident, as reported by Aave Labs and LlamaRisk, involves rsETH, a liquid restaking token issued by KelpDAO, which relies on a bridge mechanism to move tokens between blockchains. An attacker manipulated this setup by creating a forged 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 used 89,567 rsETH as collateral to borrow approximately $190 million in ETH and related assets across Ethereum and Arbitrum, exposing Aave to potentially impaired collateral. Aave Labs quickly responded 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 two possible scenarios: if losses are spread across all rsETH holders, Aave would face around $124 million in bad debt, but if losses are isolated to Layer 2 networks, the impact would be more severe, with bad debt rising to approximately $230 million. The exploit was made possible by weaknesses in Kelp's cross-chain message verification using LayerZero, allowing the attacker to extract value from the system. The incident has raised concerns about the safety of interconnected DeFi infrastructure and has led to a significant withdrawal of around $6 billion in total value locked from Aave. Discussions are underway to address potential losses, with Kelp's DAO treasury holding approximately $181 million in assets.