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 by Aave Labs and LlamaRisk, the incident revolves around rsETH, a liquid restaking token issued by KelpDAO, which relies on a bridge mechanism to transfer tokens between blockchains. An attacker manipulated this setup by creating a forged transfer message, resulting in the approval of a transfer without the tokens being removed from the sending chain, effectively creating new tokens without backing. The attacker then deposited the tokens into Aave as collateral and borrowed approximately $190 million in ETH and related assets. Aave swiftly 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 two possible scenarios: a 15% depegging of the token if losses are spread across all rsETH holders, resulting in around $124 million in bad debt for Aave, or a more severe impact if losses are isolated to Layer 2 networks, with bad debt rising to roughly $230 million. The exploit stemmed from weaknesses in Kelp's verification of cross-chain messages using LayerZero, allowing the attacker to extract value from the system. In response to the incident, users withdrew around $6 billion in total value locked from Aave, reflecting a broad pullback due to the uncertainty. The episode highlights Aave's indirect exposure to external systems, with increased collateral risk, pressure on lending positions, and a decline in deposits as users reassess the safety of interconnected DeFi infrastructure.