Crypto Coalition Unveils Plan to Mitigate Aave Token Exploit

The aftermath of a $300 million exploit typically doesn’t come with a straightforward solution. However, DeFi United, a coalition comprising multiple blockchain projects and crypto ecosystem individuals, is attempting to devise a recovery plan. This coalition has devised a detailed, step-by-step proposal to restore rsETH backing after this month’s Kelp DAO hack, which had a profound impact on DeFi lending markets, resulting in the release of over 116,000 unaccounted tokens. The plan, which has been shared on Aave’s official X account, resembles a coordinated effort to rectify the damage and stabilize the markets, relying heavily on Aave’s infrastructure to unwind the harm caused. The incident originated on April 18, when an attacker exploited a vulnerability in the rsETH bridge. By fabricating a message that appeared authentic, the attacker deceived the Ethereum side of the system into releasing 116,500 rsETH, creating a large batch of tokens without backing. These tokens were not idle; they were dispersed across multiple wallets and utilized across DeFi, with a significant portion used as collateral on Aave and other lending platforms. This is where the issue became systemic: protocols like Aave found themselves holding collateral that was not fully backed. According to the proposal, most of the exploited funds remain in circulation. Approximately 107,000 of the original 116,500 rsETH are still tied to active positions on Aave and Compound. This presents two problems that need to be addressed simultaneously: restoring the actual backing of rsETH and unwinding the loans created using the extra tokens. DeFi United’s proposal aims to tackle both aspects of the equation. To restore the backing, the group claims to have secured sufficient ETH commitments to fully re-collateralize rsETH. The plan involves feeding this ETH back into the system in stages, converting it to rsETH, and depositing it back into the system to ensure the token is fully backed. Meanwhile, attention is focused on the lending markets where the damage is most evident. Rather than allowing the situation to unfold chaotically, the plan is to intervene and carefully unwind the mess. A significant part of this involves addressing the positions the attacker opened on Aave, which are essentially loans backed by rsETH that should not have existed. Instead of waiting for these loans to collapse, the proposal suggests taking a more controlled approach to close them out. In practice, temporarily adjusting the valuation of rsETH within the system will enable these bad positions to be liquidated or closed more smoothly. As these positions are unwound, the underlying assets, such as ETH, can be recovered. The proposal estimates that this could free up around 13,000 ETH from Aave alone. Once this collateral is recovered, it will be converted into ETH and used to cover the shortfall created by the exploit, effectively filling the hole left behind. The process is not without risks, as it hinges on governance approvals across multiple chains, the successful deployment of committed funds, and a smooth execution of the unwind. Nevertheless, the plan reflects a more coordinated response than DeFi has often managed previously. If executed as intended, the ultimate goal is straightforward: the rsETH backing is fully restored, and all affected markets are stabilized, as stated in the proposal.