Crypto 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 coalition comprising multiple blockchain projects and crypto ecosystem individuals, is attempting to devise a step-by-step recovery plan. This plan focuses on restoring the backing of rsETH following the Kelp DAO hack, which triggered the release of over 116,000 unaccounted tokens and significantly impacted DeFi lending markets. The proposal outlines a coordinated approach that leverages Aave's infrastructure to rectify the damage and stabilize the markets. The incident originated from an exploit on April 18, where an attacker manipulated the rsETH bridge by forging a message, leading to the unauthorized release of 116,500 rsETH. These tokens were then distributed across multiple wallets and utilized as collateral on lending platforms, including Aave. As a result, protocols like Aave found themselves holding collateral that lacked proper backing. 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 seeks to address two primary issues: restoring the backing of rsETH and unwinding the loans created using the extra tokens. The plan involves securing enough ETH commitments to fully re-collateralize rsETH and then gradually introducing this ETH into the system to ensure the token is fully backed. Simultaneously, the proposal aims to carefully unwind the damage in the lending markets. This involves dealing with 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 and potentially cause further market disruption, the proposal suggests a controlled closure of these positions. By temporarily adjusting the valuation of rsETH within the system, these bad positions can be liquidated more smoothly, allowing for the recovery of underlying assets like ETH. The proposal estimates that around 13,000 ETH could be freed from Aave alone through this process. Once the collateral is recovered, it will be converted into ETH and used to cover the shortfall created by the exploit. Although the process carries risks, including the need for governance approvals and the successful deployment of committed funds, it reflects a more coordinated response than what DeFi has typically managed. The ultimate goal of the plan is to fully restore the backing of rsETH and stabilize the affected markets.