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. The incident 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 forging a valid 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, exposing Aave to potentially impaired collateral. Aave Labs 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 possible losses ranging from $124 million if spread across all rsETH holders to $230 million if isolated to Layer 2 networks. The exploit highlights weaknesses in Kelp's verification of cross-chain messages using LayerZero and raises concerns about the safety of interconnected DeFi infrastructure.