Coalition Unveils Plan to Mitigate Aave Token Exploit

The aftermath of a $300 million exploit typically doesn't come with a straightforward solution. However, DeFi United, a collective of blockchain projects and crypto ecosystem stakeholders, is working to develop a step-by-step plan to rectify the situation. The plan, outlined on Aave's official X account, involves a coordinated effort to utilize Aave's infrastructure and restore the backing of rsETH, which was compromised following the Kelp DAO hack. The hack, which occurred on April 18, allowed an attacker to exploit a vulnerability in rsETH's bridge, resulting in the release of 116,500 rsETH tokens without proper accounting. These tokens were then distributed across multiple wallets and utilized as collateral on various lending platforms, including Aave. As a result, protocols like Aave found themselves holding collateral that was not fully backed, creating a systemic issue. According to the proposal, the majority 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. To address this issue, DeFi United's proposal aims to restore the backing of rsETH and unwind the loans created using the exploited tokens simultaneously. The plan involves lining up sufficient ETH commitments to fully re-collateralize rsETH and feeding this ETH back into the system in stages. At the same time, the proposal focuses on the lending markets where the damage is most pronounced, seeking to carefully unwind the mess rather than allowing it to play out chaotically. A key aspect of this process involves dealing with the positions the attacker opened on Aave, which are essentially loans backed by rsETH that should not have existed. By temporarily adjusting how rsETH is valued within the system, these bad positions can be liquidated or closed more smoothly, allowing the underlying assets to be recovered. The proposal estimates that this could free up around 13,000 ETH from Aave alone. Once the collateral is recovered, it can be converted into ETH and used to cover the shortfall created by the exploit, effectively filling the hole left behind. While the process is not without risk, the plan represents a more coordinated response than DeFi has often managed in the past. If executed successfully, the ultimate goal is clear: the backing of rsETH will be fully restored, and all affected markets will be stabilized.