Crypto Coalition Unveils Plan to Mitigate Aave Token Exploit

A $300 million deficit typically doesn't come with a straightforward solution. However, the group leading the Kelp DAO recovery effort is attempting to create one. DeFi United, a coalition of multiple blockchain projects and crypto ecosystem individuals, has outlined a step-by-step plan to restore the backing of rsETH after this month's Kelp DAO hack disrupted DeFi lending markets, releasing over 116,000 unaccounted-for tokens. The proposal, 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 Ethereum side of the system into releasing funds that hadn't actually moved. These tokens were subsequently distributed across multiple wallets and deployed in DeFi, with a significant portion used as collateral on Aave and other lending platforms. As a result, protocols like Aave found themselves holding collateral that was temporarily unbacked. 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. DeFi United's proposal aims to address both the restoration of rsETH's backing and the unwinding of loans created using the extra tokens. The group claims to have secured enough ETH commitments to fully re-collateralize rsETH, planning to feed the ETH back into the system in stages, converting it to rsETH, and depositing it to ensure the token is once again fully backed. Simultaneously, the plan focuses on the lending markets where the damage is most evident. Rather than allowing the situation to unfold chaotically, the proposal suggests intervening to carefully unwind the mess. A key aspect of this involves addressing the positions the attacker opened on Aave, which are essentially loans backed by rsETH that shouldn't have existed. The proposal recommends temporarily adjusting rsETH's valuation within the system to enable the liquidation or closure of these positions in a more controlled manner. As these positions are unwound, the underlying assets, such as ETH, can be recovered, potentially freeing 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 resulting gap. The process carries risks, relying on governance approvals across multiple chains, the successful deployment of committed funds, and the smooth execution of the unwind. Nevertheless, the plan represents a more coordinated response than DeFi has often achieved in the past. If executed as intended, the ultimate goal is to fully restore rsETH's backing and stabilize all affected markets.