Coalition Unveils Plan to Mitigate Aave Token Exploit

The aftermath of a $300 million exploit typically lacks a straightforward repair guide. However, DeFi United is attempting to create one through a detailed, step-by-step proposal to restore the backing of rsETH following the Kelp DAO hack, which affected DeFi lending markets by releasing over 116,000 unaccounted tokens. The plan, shared on Aave's official X account, outlines a coordinated effort to utilize Aave's infrastructure to rectify the damage and stabilize the markets. The incident originated from an April 18 attack that exploited a vulnerability in rsETH's bridge, resulting in the unauthorized creation of 116,500 rsETH tokens without proper backing. These tokens were dispersed across multiple wallets and utilized in various DeFi applications, with a significant portion used as collateral on lending platforms like Aave. This created a systemic issue, as protocols held collateral that was temporarily unbacked. According to the proposal, the majority of the exploited funds remain active, with approximately 107,000 of the original 116,500 rsETH still tied to positions on Aave and Compound. DeFi United's proposal aims to address two key issues: restoring rsETH's backing and unwinding the loans created using the exploited tokens. To achieve this, the group has secured sufficient ETH commitments to fully re-collateralize rsETH, which will be fed back into the system in stages to restore the token's backing. Concurrently, the plan involves a controlled unwinding of the lending market mess. This includes addressing the positions opened by the attacker on Aave, which are essentially loans backed by rsETH that should not have existed. Rather than allowing these loans to collapse chaotically, the proposal suggests a controlled closure to minimize market disruption. By temporarily adjusting rsETH's valuation within the system, the bad positions can be liquidated or closed more smoothly, enabling the recovery of underlying assets like ETH. The proposal estimates that this could free up around 13,000 ETH from Aave alone, which can then be converted into ETH to cover the exploit-created shortfall. Although the process carries risks, including the need for governance approvals and successful fund deployment, it represents a more coordinated response than previously seen in DeFi. If executed as intended, the ultimate goal is to fully restore rsETH's backing and stabilize the affected markets.