Crypto Coalition Unveils Plan to Mitigate Aave Token Exploit

The aftermath of a $300 million exploit typically doesn't come with a straightforward repair guide. However, the team leading the Kelp DAO recovery effort is attempting to create one. DeFi United, a coalition comprising multiple blockchain projects and crypto ecosystem participants, has outlined a step-by-step plan to restore the backing of rsETH following this month's Kelp DAO hack, which sent shockwaves through DeFi lending markets and released 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 the 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, thereby creating a large batch of rsETH without backing. These tokens were not idle; they were dispersed across multiple wallets and deployed across DeFi, with a significant portion used as collateral on Aave and other lending platforms. This is where the issue became systemic: protocols like Aave found themselves holding collateral that was not fully backed, at least temporarily. According to the proposal, most of the exploited funds are still in circulation, with approximately 107,000 of the original 116,500 rsETH remaining tied up in active positions across Aave and Compound. This presents two problems to be solved simultaneously: restoring the actual backing of rsETH and unwinding the loans created using those extra tokens. DeFi United's proposal aims to tackle both aspects of the equation concurrently. On the backing side, the group claims to have secured sufficient ETH commitments to fully re-collateralize rsETH. The plan involves feeding this ETH back into the system in stages, converting it to rsETH, and depositing it back into the system to ensure the token is once again fully backed. Meanwhile, attention shifts to the lending markets where the damage is most visible. Instead of allowing the situation to unfold chaotically, the plan is to intervene and carefully unwind the mess. A significant part of this involves dealing with the positions the attacker opened on Aave, which are essentially loans backed by rsETH that should not have existed in the first place. Rather than waiting for these loans to collapse on their own, which could cause further market disruption, the proposal suggests guiding the system to enable these bad positions to be closed out in a more controlled manner. In practice, temporarily adjusting how rsETH is valued within the system will facilitate the smooth liquidation or closure of these positions. As these positions are unwound, the underlying assets, such as ETH, can be recovered. The proposal estimates that this could free up around 13,000 ETH from Aave alone. Once this 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. The process is not without risk, as it depends on governance approvals across multiple chains, the successful deployment of committed funds, and a smooth execution of the unwind. Nevertheless, 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 stated in the proposal.