Coalition Unveils Plan to Mitigate Aave Token Exploit

Recovering from a $300 million deficit typically doesn't come with a straightforward repair guide. However, DeFi United, the group leading the Kelp DAO recovery efforts, is attempting to create one. The coalition, comprising multiple blockchain projects and crypto ecosystem individuals, has outlined a detailed, step-by-step plan to restore rsETH backing after this month's Kelp DAO hack sent shockwaves through DeFi lending markets, releasing over 116,000 unaccounted tokens. The proposal, shared on Aave's official X account, resembles a coordinated cleanup operation that leverages Aave's infrastructure to rectify the damage and stabilize markets. The incident originated on April 18 when an attacker exploited an rsETH bridge vulnerability by forging a legitimate message, tricking the Ethereum side into releasing 116,500 rsETH without actual backing. These tokens were dispersed across multiple wallets and utilized in DeFi, with a substantial portion used as collateral on Aave and other lending platforms, leading to protocols holding unbacked collateral. According to the proposal, most exploited funds remain active, with approximately 107,000 of the original 116,500 rsETH tied up in positions across Aave and Compound. DeFi United's proposal aims to address both the restoration of rsETH backing and the unwinding of loans created using the extra tokens. The group has secured sufficient ETH commitments to fully re-collateralize rsETH and plans to feed this ETH back into the system in stages, converting it to rsETH and depositing it to restore full backing. Simultaneously, the plan focuses on lending markets where the damage is most visible, intending to carefully unwind the mess instead of letting it play out chaotically. A significant part involves dealing with the attacker's positions on Aave, which are essentially loans backed by rsETH that shouldn't exist. The proposal suggests temporarily adjusting rsETH's valuation to enable these bad positions to be liquidated or closed more smoothly, potentially freeing up around 13,000 ETH from Aave alone. Once the collateral is recovered, it will be converted into ETH to cover the exploit-created shortfall. Although the process carries risks, including governance approvals and smooth execution, it represents a more coordinated response than DeFi has previously managed. The ultimate goal, as stated in the proposal, is to fully restore rsETH backing and stabilize all affected markets.