Coalition Unveils Proposal to Mitigate Aave Token Exploit

Recovering from a $300 million loss is no easy feat, but DeFi United is attempting to create a roadmap for restoration. The coalition has devised a detailed, step-by-step strategy to reestablish the backing of rsETH following the Kelp DAO hack, which sent shockwaves through DeFi lending markets and released over 116,000 unaccounted tokens. The proposal, shared on Aave's official X account, resembles a coordinated recovery effort, relying heavily on 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, forging a message to trick the Ethereum side into releasing 116,500 rsETH, creating a large batch of tokens without backing. These tokens were not idle; they were distributed across multiple wallets and utilized as collateral on Aave and other lending platforms. This is where the issue became systemic, as protocols like Aave found themselves holding collateral that was not fully backed. According to the proposal, most of the exploited funds remain in play, with approximately 107,000 of the original 116,500 rsETH still tied up in active positions across Aave and Compound. This presents two problems to be solved simultaneously: restoring the actual backing of rsETH and unwinding the loans created using those extra tokens. DeFi United's proposal aims to address both issues. The group claims to have secured enough ETH commitments to fully re-collateralize rsETH, planning to feed that ETH back into the system in stages, converting it to rsETH, and depositing it back into the system to ensure the token is once again fully backed. At the same time, the proposal focuses on the lending markets where the damage is most visible. Instead of allowing the situation to unfold chaotically, the plan involves carefully unwinding the mess. A significant part of this process involves dealing with the positions the attacker opened on Aave, essentially loans backed by rsETH that should not have existed in the first place. Rather than waiting for those loans to collapse, the proposal suggests intervening to close them in a more controlled manner. Temporarily adjusting how rsETH is valued inside the system will enable those bad positions to be liquidated or closed more smoothly. As those positions are unwound, the underlying assets, such as ETH, can be recovered, potentially freeing up around 13,000 ETH from Aave alone. Once that 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 carries risks, relying on governance approvals across multiple chains, the successful deployment of committed funds, and a smooth execution of the unwind. However, the plan represents a more coordinated response than DeFi has previously managed. If executed as intended, the ultimate goal is clear: "rsETH backing is fully restored, and all affected markets are stabilized," as the proposal states.