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 losses of up to $230 million, depending on the resolution of the situation. The incident involves rsETH, a liquid restaking token issued by KelpDAO, which relies on a bridge mechanism to move tokens between blockchains. An attacker exploited this setup by creating a forged transfer message, resulting in the creation of new tokens without backing, and releasing 116,500 rsETH from the Ethereum-side bridge. Instead of selling the assets, the attacker deposited 89,567 rsETH into Aave as collateral and borrowed approximately $190 million in ETH and related assets. Aave Labs took swift action to contain the risk, freezing rsETH markets and halting new borrowing against the asset. The outcome now depends on how Kelp handles the shortfall, with potential losses ranging from $124 million if spread across all rsETH holders to $230 million if isolated to Layer 2 networks. The exploit stemmed from weaknesses in Kelp's cross-chain message verification process 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of interconnected DeFi infrastructure and has led to a broad pullback, with around $6 billion in total value locked withdrawn from Aave.