Crypto Coalition Unveils Proposal to Mitigate Aave Token Exploit

Unlike typical $300 million losses, this one may come with a roadmap to recovery. DeFi United, a coalition comprising multiple blockchain projects and crypto ecosystem stakeholders, has devised a meticulous, step-by-step strategy to re-establish rsETH backing after this month's Kelp DAO hack, which released over 116,000 unaccounted-for tokens. The proposal, shared on Aave's official X account, resembles a synchronized damage-control 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 by forging a legitimate-appearing message, tricking the Ethereum side into releasing 116,500 rsETH without actual backing. These tokens were not idle; they were disseminated across multiple wallets and deployed throughout DeFi, with a substantial portion used as collateral on Aave and other lending platforms, rendering the issue systemic. Protocols like Aave found themselves holding under-backed collateral, with the majority of the exploited funds still active - approximately 107,000 of the original 116,500 rsETH remain tied to positions on Aave and Compound. DeFi United's proposal tackles both restoring rsETH backing and unwinding loans created using the extra tokens. To address the backing, the group claims to have secured sufficient ETH commitments to fully re-collateralize rsETH, intending to gradually reintroduce this ETH into the system, converting it to rsETH and re-depositing it to restore full backing. Concurrently, attention shifts to the lending markets where the damage is most pronounced. The plan involves carefully unwinding the chaos rather than allowing it to unfold chaotically. A significant aspect involves addressing positions the attacker opened on Aave - essentially loans backed by rsETH that should not have existed. Rather than waiting for these loans to collapse, the proposal suggests guiding the system to enable their controlled closure. Temporarily adjusting rsETH's valuation within the system will facilitate the liquidation or closure of these bad positions, allowing the recovery of underlying assets like ETH. The proposal estimates this could liberate around 13,000 ETH from Aave alone, which would then be converted to ETH and utilized to cover the exploit-created shortfall. While the process carries risks, relying on governance approvals, committed fund deployment, and smooth execution, it represents a more coordinated response than DeFi's historical efforts. The ultimate goal, as stated in the proposal, is straightforward: 'rsETH backing is fully restored, and all affected markets are stabilized.'