Aave Faces Potential Losses of Up to $230 Million Following Kelp DAO Bridge Exploit

A recent bridge exploit involving Kelp DAO and LayerZero has put lending protocol Aave at risk of losing up to $230 million, with the actual amount dependent on 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. The protocol utilizes a bridge mechanism to transfer rsETH between blockchains by locking tokens on one chain and issuing corresponding copies on another. An attacker exploited this setup by creating a forged transfer message that appeared legitimate, resulting in the system approving the transfer despite the tokens never leaving the sending chain. This effectively created new tokens without backing, releasing 116,500 rsETH from the Ethereum-side bridge. Instead of selling the assets on the open market, the attacker deposited 89,567 rsETH into Aave as collateral and borrowed approximately $190 million in ETH and related assets across Ethereum and Arbitrum, according to the report. This exposed Aave to collateral whose backing may be significantly impaired. Aave Labs acted quickly to mitigate the risk, freezing rsETH markets across its deployments, setting loan-to-value ratios to zero, and halting new borrowing against the asset within hours. The outcome now largely depends on how Kelp handles the shortfall. If losses are spread across all rsETH holders, the token would experience an estimated 15% depegging, resulting in approximately $124 million in bad debt for Aave. If losses are instead isolated to Layer 2 networks, the impact would be more severe, with bad debt rising to roughly $230 million and concentrated on networks such as Arbitrum and Mantle. The exploit stemmed from weaknesses in Kelp's cross-chain message verification process using LayerZero. By manipulating this process, the attacker was able to make certain assets appear fully backed when they were not, allowing them to extract value from the system. While LayerZero itself was not directly hacked, its messaging layer exposed flawed assumptions in Kelp's cross-chain data validation. The incident raised concerns that some positions on Aave were backed by collateral that was mispriced or no longer fully backed, increasing the risk of undercollateralized loans. In response, users moved to reduce their exposure, withdrawing around $6 billion in total value locked from Aave following the incident. This reflects a broad pullback as participants reacted to the uncertainty. The episode highlighted Aave's indirect exposure to external systems, with the impact felt through increased collateral risk, pressure on lending positions, and a sharp decline in deposits as users reassessed the safety of interconnected DeFi infrastructure. The report stated that the DAO treasury holds approximately $181 million in assets and that discussions are underway with ecosystem participants to address potential losses. However, Kelp has not yet outlined how it plans to allocate losses, leaving Aave's ultimate exposure uncertain as the situation continues to evolve. Read more: Kelp DAO claims LayerZero's 'default' settings are what actually caused the massive $290 million disaster