Crypto Coalition Unveils Plan to Mitigate Aave Token Exploit

A $300 million shortfall typically doesn't come with a straightforward repair guide. However, the group leading the Kelp DAO recovery effort is attempting to create one. DeFi United, a coalition of multiple blockchain projects and crypto ecosystem individuals, has outlined a detailed, step-by-step plan to restore the backing of rsETH after this month's Kelp DAO hack sent shockwaves through DeFi lending markets, releasing over 116,000 unaccounted-for tokens. The proposal, shared on Aave's official X account, resembles a coordinated cleanup operation, relying heavily on Aave's infrastructure to undo the damage and stabilize markets. The incident originated on April 18, when an attacker exploited a vulnerability in rsETH's bridge, forging a message that appeared legitimate and tricking the Ethereum side of the system into releasing 116,500 rsETH, creating a large batch of rsETH without backing. These tokens were dispersed across multiple wallets and deployed across DeFi, with a significant portion used as collateral on Aave and other lending platforms. As a result, protocols like Aave found themselves holding collateral that wasn't fully backed. According to the proposal, most 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. This presents two problems to be solved simultaneously: restoring rsETH's backing and unwinding the loans created using the extra tokens. DeFi United's proposal aims to address both issues concurrently. To restore backing, the group has secured enough ETH commitments to fully re-collateralize rsETH, planning to feed the ETH back into the system in stages, converting it to rsETH and depositing it back into the system to ensure the token is fully backed. Meanwhile, attention turns to the lending markets where the damage is most visible. Rather than allowing the situation to unfold chaotically, the plan involves carefully unwinding the mess. A key aspect of this involves dealing with the positions the attacker opened on Aave, which are essentially loans backed by rsETH that shouldn't have existed. Instead of waiting for these loans to collapse, the proposal suggests intervening to close them in a more controlled manner. Temporarily adjusting rsETH's valuation within the system will enable these bad positions to be liquidated or closed more smoothly, allowing the underlying assets, such as ETH, to be recovered. The proposal estimates this could free up around 13,000 ETH from Aave alone. Once the collateral is recovered, it will be converted into ETH and used to cover the shortfall created by the exploit, effectively filling the hole left behind. Although the process carries risks, it hinges on governance approvals across multiple chains, the successful deployment of committed funds, and a smooth execution of the unwind. The plan reflects a more coordinated response than DeFi has often managed previously. If executed as intended, the ultimate goal is straightforward: 'rsETH backing is fully restored, and all affected markets are stabilized,' as the proposal states.