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, pending the resolution of the situation. 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 fake transfer message, resulting in the creation of new tokens without backing, and releasing 116,500 rsETH from the Ethereum-side bridge. The attacker then deposited 89,567 rsETH into Aave as collateral and borrowed approximately $190 million in ETH and related assets across Ethereum and Arbitrum, leaving Aave exposed to potentially impaired collateral. Aave Labs quickly 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 two possible scenarios: if losses are spread across all rsETH holders, the token would face an estimated 15% depegging, resulting in around $124 million in bad debt for Aave, or if losses are isolated to Layer 2 networks, the impact would be more severe, 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. The incident has raised concerns about the safety of interconnected DeFi infrastructure and has led to a 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.