Aave Faces Potential Losses of Up to $230 Million Due to 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 by Aave Labs and LlamaRisk, the incident involves rsETH, a liquid restaking token issued by KelpDAO, which uses a bridge mechanism to transfer tokens between blockchains. An attacker manipulated this setup by creating a fake transfer message, resulting in the release of 116,500 rsETH from the Ethereum-side bridge without actual backing. 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 largely depends on how Kelp handles the shortfall, with possible loss estimates ranging from $124 million if losses are spread across all rsETH holders to $230 million if losses are isolated to Layer 2 networks. The exploit was caused by weaknesses in Kelp's verification of cross-chain messages using LayerZero, allowing the attacker to make certain assets appear fully backed when they were not. This incident has raised concerns about the potential for mispriced or undercollateralized loans and has led to a significant withdrawal of around $6 billion in total value locked from Aave. The report highlights Aave's indirect exposure to external systems and the need for continued discussions with ecosystem participants to address potential losses.