Coalition Unveils Proposal to Mitigate Aave Token Exploit

Typically, a $300 million shortfall does not come with a straightforward solution. However, the group leading the recovery effort from the Kelp DAO hack is attempting to devise a repair plan. DeFi United has proposed a detailed, step-by-step approach to restore the backing of rsETH after the recent hack sent shockwaves through DeFi lending markets, resulting in the release of over 116,000 unaccounted tokens. The plan, shared on Aave's official X account, resembles a coordinated cleanup operation, relying heavily on Aave's infrastructure to rectify the damage and stabilize markets. The incident originated on April 18, when an attacker exploited a vulnerability in rsETH's bridge, creating 116,500 rsETH without backing by tricking the system into releasing funds that hadn't actually moved. These tokens were then dispersed across multiple wallets and utilized in DeFi, with a substantial portion used as collateral on Aave and other lending platforms, leading to protocols holding collateral that was temporarily under-backed. According to the proposal, most of the exploited funds remain active, with approximately 107,000 of the original 116,500 rsETH still tied up in positions across Aave and Compound. This presents two pressing issues: restoring rsETH's backing and unwinding the loans created using the extra tokens. DeFi United's proposal aims to address both problems simultaneously. To restore backing, the group has secured sufficient ETH commitments to fully re-collateralize rsETH, which will be fed back into the system in stages. Meanwhile, the plan focuses on carefully unwinding the damage in lending markets. This involves dealing with the positions the attacker opened on Aave, essentially loans backed by rsETH that should not have existed. Rather than allowing these loans to collapse chaotically, the proposal suggests a controlled closure. Temporarily adjusting rsETH's valuation within the system will enable the liquidation or closure of these bad positions, allowing the recovery of underlying assets like ETH. The proposal estimates this could free up around 13,000 ETH from Aave alone, which will then be converted into ETH to cover the exploit's shortfall. Although the process carries risks, including the need for governance approvals and the successful deployment of committed funds, it reflects a more coordinated response than DeFi has previously managed. The ultimate goal is to fully restore rsETH backing and stabilize affected markets.