Crypto Coalition Unveils Proposal 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 of blockchain projects and crypto ecosystem stakeholders, is attempting to provide one. Following the Kelp DAO hack earlier this month, which sent shockwaves through lending markets, the group has outlined a step-by-step plan to restore the backing of rsETH. The proposal, shared on Aave's official X account, is a coordinated effort to utilize Aave's infrastructure to rectify the damage and stabilize the markets. The incident occurred on April 18 when an attacker exploited a vulnerability in rsETH's bridge, resulting in the release of 116,500 rsETH tokens without proper accounting. These tokens were subsequently dispersed 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 not fully backed. According to the proposal, most of the exploited funds remain active, with approximately 107,000 of the original 116,500 rsETH still tied to positions on Aave and Compound. The proposal aims to address two key issues: restoring the backing of rsETH and unwinding the loans created using the exploited tokens. To achieve this, DeFi United has secured sufficient ETH commitments to fully re-collateralize rsETH. The plan involves feeding 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 proposal focuses 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 aspect of this involves dealing with 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 adjusting the system to enable their closure in a more controlled manner. By temporarily modifying how rsETH is valued within the system, those bad positions can be liquidated or closed more smoothly, allowing the recovery of underlying assets like ETH. The proposal estimates that this could free up around 13,000 ETH from Aave alone. Once the 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. While the process carries risks, including the need for governance approvals across multiple chains and the successful deployment of committed funds, the plan represents a more coordinated response than DeFi has often managed in the past. If executed as intended, the ultimate goal is to fully restore the backing of rsETH and stabilize all affected markets.